Is Your Capital Project Management Headed Toward a Forensic Audit?

Capital Project Management

Do it right on the front end or suffer the forensic audit process on the back end
by Lewis F. McLain, Jr, Executive Director, GFOAT
Written July 2000; Tweaked April 2016


It has been almost a quarter of a century since I heard those scathing words as David Leininger, Fiscal Services Director, had his finance director, internal auditor, purchasing agent and budget director (yours truly) sitting side-by-side on a long sofa in his office like school boys waiting to be called into the principal’s office to take our licks.

A $30 million sewer treatment plant project was in trouble. It was over schedule and over budget, but that was not the worse part. Change orders had been approved by a utilities director. Some had not been approved at all. Paperwork was not centralized. In fact, it was a mess. As the partial story was being told to us, we found ourselves pointing to someone else on the sofa or in the general direction of the engineering department downstairs or the utilities department across the street. Before we could get the flimsy words of excuse out of our mouths, we were blasted with the caustic words that are still scorched on my backside.

Since the project was 75% grant funded, an audit by the feds was about to occur and every one of the fiscal players in this large city of 100,000+ assumed someone else was in charge of the project and communicating the details to upper management and the council. I think that is when I first learned that “assume” means “making an ass out of you and me” when applied to big-ticket matters like capital projects.

Every file cabinet in the utilities department was confiscated and placed in an empty room in fiscal administration about the size of a double garage. Any other files or correspondence between a dozen players (EPA, the contractor, the city, etc.) held by anyone in the city was ordered to be brought to the room. A secretary then spent several weeks building a file system with information labeled, classified and put in chronological order. It then took several more weeks of review before our boss, David Leininger, figured out the story to the best of his ability, realizing there were a number of holes that still existed in the information. Some were never sufficiently answered.

Just about every problem that could be imagined had become part of the story of sloppiness in controls and absence of communication. Every player in every responsible department, in addition to the fiscal departments, failed to do their job. Even the most basic things were not covered. Copies of legal documents, signatures, briefings and authorizations were incomplete. All of the questions that had never been asked became obvious as they were being asked in the context of the aftermath of a train wreck that left a pile of administrative and fiscal rubble.

And the Beat Goes On

 What is even more amazing as I think back over this nightmare experience of 25 years ago is that I can read about at least a half-dozen similar stories making the headlines in today’s papers as I write this article. And it has been that way all these years. I addressed a city council the other night after they had heard a forensic audit report on a golf course project, one that paralleled my sewer story of long ago. It occurred to me that I actually know of very few cities that would lift up their capital project management control and fiscal reporting systems for peer scrutiny without some trepidation. Those cities with good capital project management systems, I said, are probably those cities that have experienced one or more project blunders of the magnitude this forensic auditor had just unveiled.

When did “Forensic” replace “Fraud?”

I’ve asked two forensic auditors just exactly when did the word “forensic” start being used as an adjective to describe an audit or auditor. Neither was certain. One jokingly said, “It means we audit dead bodies.” I turned to the dictionary, which broadened and deepened my understanding of the word, “forensic.” Merriam-Webster says this adjective comes from the Latin forensis or public – where we get our word forum. Forensic is not a new word. It dates back to 1659 and means: belonging to, used in, or suitable to courts of judicature or to public discussion and debate. It relates to or deals with the application of scientific knowledge to legal problems <forensic medicine> <forensic science> <forensic pathologist> <forensic experts>. And now we add <forensic audit>.

So it does not mean fraud necessarily but is the piecing together and story-telling of just exactly what happened. It is somewhere between a mystery novel and the product of bond attorneys when you sell bonds: what they call a “transcript of proceedings” that has every legal and procedural document and detail from the authorization to sell the bonds to the signatures on all of the final disclosures and the delivery of the money into the proper accounts.

The product of an in-depth forensic audit is the documentation of the story of how budgeting and capital project management goes wrong. Even if there is no malfeasance found, it is the report card on the basics of the very business that public finance officials are called to participate in if not lead! It may support the probability of recovering money from someone who owes the city some of the money lost, wasted, or stolen.

The remainder of this article will be a review of the role finance officials should play in capital project management. It will cover some of the procedures and reports that should be the products of the finance officials. The term finance officials includes in some form, depending on the city size and organizational structure: the finance director, the capital project accountant or budget analyst, the purchasing agent and the internal auditor. There are several public works type players, of course, as well as the legal department that should be part of the Capital Project Management Team reporting to city management.

General Ledger and Project Management Accounting Incongruities

One of the first things a finance official learns is that capital project budgeting and accounting do not fit into the same accounting system and cycle as you might otherwise desire to mold it. Some things are similar. Both capital project funds and operating funds can include moneys from other sources such as grants or impact fees that supplement the primary source of revenues.

However, the primary source of funds for capital projects is usually long-term debt or bond funds. Bond funds are often authorized by the voters. There is usually a need to account for the “bonding authorization” from the receipt of the proceeds to the complete spending on the intended purpose. Impact Fees have to be accounted for by type (water, sewer, roadway) and even by geographic area in some cases. Capital projects do not fit well into the annualized segmentation of spending as the operating funds do.

Most capital projects span a period of two or more years. Many capital projects are phased for contract award and scheduling purposes. Almost all capital projects have major cost components, all of which need to have some level of budget and accounting control by component: Right-of-way acquisition, engineering and design, utility relocation, site preparation, construction and other key components that will be enumerated later.

So there needs to be separate funds established and the account coding structure that allows you to separate water projects from road projects. The projects themselves need to have the ability to provide a breakdown in the major project cost components. In addition, the projects may need to capture city labor and material costs as well as direct payments made to contractors and others.


There should be several reports:

Capital Budget Reports: The capital budgeting process itself should be compiled with sufficient detail to provide each member of the Capital Project Management Team, as well as city management office and city council, the ability to ask questions. The capital improvement budget should have an individual form for each project. The budget form should include as a minimum:

  • The title of the project and account number assignments.
  •  The name of project manager or city department and the name of key players such as architects, engineers and contractors.
  •  A description of the project and a small locator map to orient the reader as to the part of town the facility is to be built or the starting and ending point of roads or utility lines.
  •  A cost breakdown by key component:
    •  Administration/Debt Issuance.
    •  Land acquisition (including ROW, legal costs of condemnation and outright land purchases).
    •  Architectural/Engineering Fees.
    •  Utility relocation.
    •  Site Preparation and drainage improvements.
    •  Construction costs.
    •  Lighting.
    •  Landscaping/Irrigation.
    •  Equipment, furnishings, signage.
    •  Other.
  •  The source of funds.
    •  Current funds.
    •  Bond funds.
    •  Impact Fees.
    •  Grants.
    •  Other.
  •  The sources and uses of funds broken down by year for the next several years, usually at least five years.
  •  The general status of the project, including chronological and authorization information.
  •  Contract award dates.
  •  Expected completion dates.
  •  Reason and expected remedies for any delays or complications.
  •  Affirmation of any future bond issue needs.
  •  Affirmation that project is progressing as planned if that is the case.
  •  The capital improvement budget details should be summarized in front of the compiled document:
    • By project types (i.e. water, roadways).
    • By funding sources (i.e. bonds, grants).
    • By fiscal year.

Capital Project Accounting Reports. It is equally imperative that the city provide good monthly accounting reports to show the sources of funds and the spending of money:

  • At the project cost component level.
  • This detailed information should be summarized at the project level as well as the fund level.
  • There should also be a good comparative horizontal time and status segregation of information on the capital accounting reports.
  • The original bond authorization by the voters, if applicable.
  • The original budget approved by the council appropriating the funds to individual capital project funds.
  • The official revised budget that has been approved by the city council.
  • The projected budget that is going to be needed to finish the project, subject to council approval.
  • The expenditures for the monthly period.
  • The life-to-date expenditures.
  • The remaining budget authorization (the difference between the council approved revised budget and the life-to-date expenditures).
  • The remaining funds needed to be authorized to finish the project (the difference between the projected final budget and the council approved revised budget).
  • A reference column to notes and comments that can be located at the back of the accounting report.

So, What Are We To Do With The Reports?

The answer is to use them as the centerpieces of timely project review meetings and improved communication. The lack of good and timely capital project management reports is a universal weakness in cities across Texas. The larger shortcoming, however, is in something even more basic: communication. There is often minimal dialogue between the finance department and public works or parks department. The legal department is brought in only when there is a problem. The planning department is often not a player at all except in big-picture capital planning. Moreover, the busyness of the city management office hampers systematic reviews. Rather the involvement is in the form of injections into the capital project management process that are event driven, such as a roadway project that has suddenly become a hot topic with the council.

Wait a minute! We must pause to really look at this aspect of capital project management. The city has millions of dollars tied up in dozens or hundreds of projects. Each project has multiple steps, most with a medium to high degree of technical or political complexity. The duration of a project can be from months to years. In addition, the Capital Project Management Team is perhaps only an ad hoc gathering at best and a phantom committee at its worst. The financial players are off worrying over monitoring a few thousand dollars of travel accounts and office supplies while millions of dollars in capital projects are left unchecked. What’s wrong with this picture?

The answer is that everything is wrong, and it shows up in the forensic audit. In the golf course example mentioned earlier, the project manager was the city manager! The public works director wasn’t involved and neither was the parks director or a golf course manager. The finance director paid whatever the city manager sent him to pay without question. Nobody asked questions and nobody knew where the project stood financially. One of the saddest pieces of evidence I have ever seen was the handwritten notes of a city manager trying to figure out the basic arithmetic of determining how many dollars had been spent and how many were still available for change orders.

Statesmanship skills are not very helpful once a forensic auditor has held up the mirror to the fundamental process of control and reporting. As one of our senators said in another matter, “If you can put a pretty face on this deal, then you ought to be a mortician instead of a politician!”

Systematic and Timely Review of Project Status.

The finance official should be highly involved in capital project management. The involvement should extend well beyond just selling the bonds to fund projects and writing the checks to pay for the projects. Finance people can blend their natural levels of healthy skepticism with much of the same talents of logic acquired from their training and, most importantly, their innate drive to maintain the integrity of numbers to be good team players on the Capital Project Management Team. They can even lead the team in some cases!

The following is a list of suggestions and comments that can help the Capital Project Management Team be more effective:

  • The city manager needs to deputize the Capital Project Management Team with the responsibility to be accountable to each other and to be given the weight of team responsibility. In other words, “Everything is the responsibility of each one of you unless I specifically say it is not!” There is certainly a practical limit or differentiation between public works and the finance departments, but the point is to let everybody know that you are authorized and expected to ask questions of each other and to report to the city manager those items in need of his or her attention.
  • Capital project review meetings need to be held regularly. These should at least be quarterly in terms of a big-picture overview, monthly for specific project progress reports, and perhaps even weekly in the case of projects in trouble or when indications are that they are about to be in trouble.
  • Each project needs to be assigned to someone in the organization, and that person need to be in on meetings involving their projects.
  • Don’t be afraid to invite the city attorney into the process. Weigh the cost of problem preventive as opposed to the time and effort to rectify a project in trouble.
  • There needs to be an agenda for these meetings to include either a project-by-project review or a categorization:
  • Those in the planning stage.
    • Under design.
    • Right-of-way/Land acquisitions.
    • Utility relocation.
  • Those under construction.
  • Those in final stages of completion.
  • Those completed and ready for finalization.
  • Those projects in the planning stage need to be reviewed for completeness and accuracy in terms of timing and financial analysis. It is all too common for there to be a complete ball field built with the bleachers left out. Or a parking lot to be built without lights. Or landscaping and irrigation to be left out. The bad part is when cities have ignored or underestimated the cost of meeting their own landscaping ordinances. Ouch! The finance officer should be a part of reviewing bids and, in some cases, comparing to other cities’ recent experience. Why would you be surprised if library bids were 25% over expectations (or bond election authorization) if the bids you received are in line with two comparable libraries in the region that have been built or awarded in the last six months?
  • Projects in the design stage can provide the red flags of budget problems that will be fully revealed within a few months. If the city’s plans were to build a sewer line along a route that required hundreds of trees to be cut down, and now you realize that’s not going to happen due to environmental protests and city tree ordinance violations, what is going to happen to the project? Another longer route or a much more expensive process of tunneling under trees is likely to raise the ultimate budget significantly. You don’t need to wait for the design to be finished or surely not have to wait for the bids to come in to know that the original capital budget for a project is woefully deficient. You may not be solely responsible for asking every question, but you can contribute to the team appointed to ask those kinds of questions.
  • Many projects are put on hold while land acquisition and right-of-way issues are involved. Without trying to always be throwing cold water on capital project management, someone needs to be asking about the progress of those decisions that virtually stop a project dead in its tracks until resolved. It is not unusual for bond money to be provided for a construction project that doesn’t occur for up to three or more years after original expectations. This is often due to some fundamental initial step, such as right-of-way acquisition being impossible to accomplish within the original unrealistic time frame. Remember, a forensic audit is taking a problematic result and working the problem backwards. A golf course opening isn’t going to happen until there is grass, so when you miss the intended grass maturation season, it’s not too hard to figure out that some of the big operating costs are going to begin, but the projected revenue for the delayed period is zilch.
  • The construction phase is when the big bucks start going out the door and many of the problems start to surface. Bad designs or missed points or a lack of firm decisions or bad contractors translate into delays, change orders, confrontations, finger pointing and lawsuits. Our “low-bid” environment exacerbates the problem. I was once told that ship builders intentionally bid projects below their costs, knowing that the profit will be in the numerous change orders when the owners finally start thinking through amenities and structural changes that never got addressed in the planning stages. Everyone who has ever built a house from the blueprint stage to the move-in date without experiencing a hitch of some kind, often very costly, could meet in a phone booth! Why would we think that a multi-million dollar, multiyear project could be built from start to finish without an enormous amount of oversight and end up within schedule and within budget?
  • The completion stage is not usually easy and requires that everyone on the Capital Project Management Team double their efforts to reach closure without letting something fall through the cracks. Checklists are helpful here. Before you release retainage money that has been withheld, do you have all of the as-built plans? Are all of the performance bonds in place (actually a first step that should have been accomplished long ago)? Do you have operating manuals for building equipment? Has a complete punch-list been rectified? Has all of the clean-up work been accomplished? Is all signage in place? Has the City formally taken action by the council to accept the project?

Documentation and Authorizations

The forensic audit highlights what happens when there is inadequate documentation. A big part of the documentation is in the previously mentioned budget and accounting reports or items related to the preparation of the reports. But there should be a very clear paper trail among the public works, city secretary, city attorney and finance departments that includes:

  • The bond authorization documents, including the literature that was used to promote the bond election that contains any listing of the specific projects that are being promised or suggested to be build and their associated costs.
  • Bid documents that include a great deal of specificity about how the bid estimate was compiled, such as the square yards of concrete, number of light standards, acres of landscaping, area of irrigation coverage, number of manholes, length and size of pipe and depth of pipe to be buried – and all of the unit costs.
  • All contracts fully executed, many of which will include detail budget accounting information, such as an aggregation of the bid quantities just mentioned. Also, the contracts will include the number of allotted days, rain day allowances, penalties for contractor delays and other important information to turn to when something goes wrong.
  • Change orders, with all of the supporting information to explain the purpose.
  • Correspondence between architects, engineers, contractors and the city that include references to contract interpretation, notifications of problems or events that are occurring that are signals of a conflict carrying a potential negative fiscal impact. Each member of the Capital Project Management Team should be duty-bound to keep each other advised and to communicate clearly and timely to the city management office well before little problems turn into big project overruns.
  • It is very important to have proper signatures and council action taken on all matters of bid awards, contract change order authorizations and budget amendments. Further, there should be a trail of briefing memos and/or council minutes that reflect the council’s knowledge and understanding of events as well as directives for staff actions.

Closing Thoughts.

Almost every capital project that turns into a “train wreck” can be shown to be an avoidable situation. The forensic audits are teaching lessons on how simple it sounds when the breakdowns are often tied to issues that should never happen. Here are a few thoughts.

  • You must have public works, finance (budget, accounting, purchasing), risk management, legal and other personnel associated with capital projects in the city who are willing to communicate with one another. They don’t have to be the best of friends, but there should be some healthy respect for what the others can contribute and what they all need individually and collectively to keep themselves and the city out of trouble. It is my estimation that communication does not exist in many cases, leading to symptoms and results that are not much different than those found in a dysfunctional family. If there is a potential team player that, in fact, shows an unwillingness to communicate, cooperate and participate, then I suggest there may need to be some staff changes in the city.
  • There needs to be sufficient staffing. In addition to being a team player, there should be a great emphasis placed on sufficient staffing. Why would we initiate a $10 million or $50 million capital improvement plan and not think there is going to be some added management and accounting requirements and costs involved? This issue particularly grieves me when a forensic audit eliminates malfeasance as a factor and then points to a seemingly noble excuse: a desire to save the city money by having the work done by a fatigued staff that is already too thin to manage all but the normal day-to-day fiscal operations, not to mention a sizable capital program! Why would a city manager be acting in the role of a project manager for a golf course that ended up with almost a $3 million overrun or 50% greater than the original estimates?
  • There needs to be good project accounting software in place to assist with controls and reports. Capital project management and reporting cannot simply be integrated into many of the general ledger systems. A great deal can be done with some creative account numbering if there is the flexibility to custom design the reports produced from the accounting system. If that is not the case, the city may be well served to look at modules within their own software vendor packages that are geared toward the characteristics of capital project management.


Capital project management involves controlling and accounting for huge amounts of public moneys. There should be several key players on the Capital Project Management Team, including the financial officers. In most cases, there should be a dedicated capital project accountant or budget analyst who is freed from operating budget details to focus on the capital project side of the house. That person needs to be in constant communication with public works personnel and others in the city handling some aspect of capital project management. There should be regular reports and meetings with early warning signs of project problems that reach the city management office and the city council in a timely manner.

The finance department can not only be a team player but may actually be able to provide some needed leadership, depending on the size of the city and the organization and communication skill level of other participants on the Capital Project Management Team. It is very clear that the finance officials cannot stick their heads in the sand by saying that capital project management is the responsibility of someone else in the organization. If that were the case, I would advise you to get written authorization freeing you from the fiduciary duties that are the underpinnings of basic financial management and control. I can’t imagine you getting that authorization nor can I imagine you wanting to work for an organization granting you that exemption. It certainly becomes the centerpiece of analysis when the forensic audit is conducted. The better advice is to be properly staffed and to insist that you be involved – perhaps even to take the lead in good capital project management.

Here is a test. The City Manager calls in key department heads, including finance, public works, parks and every department involved in a capital project of almost any size. The City Manager has only these questions:

  • What is the status for all of the projects we know we are having troubles with
  • What are the projects heading for trouble you haven’t told me about yet?
  • What are the projects headed for trouble even you don’t know about right now but should? LFM



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