This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its June 2016 report entitled Change Order Process Audit, Edmonton’s City Auditor found that notwithstanding no formal change order process, “the majority” of the City of Edmonton’s change orders met the expected due diligence standards in four assessed areas: (i) proper justification; (ii) documented rationale; (iii) appropriate approvals; and (iv) recorded contract change. However, the report also found high levels of non-compliance, with compliance rates of only 84 percent, 65 percent, 56 percent, and 80 percent respectively in those four assessed areas. For example, while the audit stated that “84 percent of the contracts we reviewed were adequately justified and reasonable”, it also found “[four] contracts that had change orders that did not meet our criteria to be considered adequately justified and reasonable.” Furthermore, while the report noted that “68 percent of the contracts we reviewed had adequate supporting documentation”, it also found “there were [eight] contracts that had change order files that did not meet our criteria for adequate supporting documentation.”
The report found even greater weaknesses in proper authorizations, noting that only 56 percent of change orders in the reviewed contracts “were properly authorized” and that specifically, “11 contracts…had change orders that did not meet [the] criteria for being properly authorized.” Finally, the report found gaps in the proper recording of the change order amendments, observing that “the change orders used in 80 percent of the contracts we reviewed were properly recorded in the City’s financial system”, while also finding “5 contracts that had change orders that were not properly recorded.”
While Edmonton’s City Auditor found that the City was following appropriate due diligence standards in a “majority” of cases, the proper stewardship of public funds would typically call for higher rates of compliance than those found in this audit.
As this case study illustrates, the failure to establish a formal change order process can impede an institution’s ability to maintain the levels of compliance that would be expected in the management of public resources.
