Top 5 Contract Audit Findings

Does your local agency hire consultants and contractors to perform architectural, engineering, construction or other related services to develop and deliver federal-aid projects?

If your local agency does (as most do), the observations from recent audits of various local agency federal-aid contracts may be of interest. Review the top five common mistakes identified by the Division of Local Assistance to avoid losing federal funds on your projects.

1. Improper Procurement Practices

Failure to follow required consultant contract procurement process per federal regulations. Significant violations include:

  • Missing key documents in project procurement file (i.e. proof of advertising, all score sheets, profit negotiations, cost estimates etc).
  • Selection criteria’s weighted values are not included in the RFPs/RFQs.
  • Selection of consultant was not based on the RFP/RFQ stated selection criteria and stated selection criteria’s weighted values.
  • A detailed independent cost estimate was not prepared before proposals are received.
  • Profit was not negotiated as a separate cost item.

2. Poor Contract Administration of Consultant’s Services Contracts

Failure to maintain contract administration systems and proper management to ensure consultants perform in accordance with the terms and conditions of contracts. Significant violations include:

  • Amending an expired contract.
  • Making significant changes to the original scope of a contract.
  • Charging rates not consistent with the contract cost proposal.
  • Making changes in key personnel without prior approval.
  • Adding classifications or personnel without prior approval.
  • Method of payment is inconsistent with method of payment stated in the RFP and the signed contract.

3. Poor Contract Administration of Construction Contracts

Failure to maintain a contract administration system to ensure payments to contractors are supported by project records. Significant violations include:

  • Line Item quantities are not supported by project records
  • Construction Change Orders (CCO) are not supported by independent cost estimates, were not properly approved and/or costs claimed are not properly documented.
  • CCO’s work is not within the scope of the original contract (i.e. Contractor caused damage and repair).

4. Avoiding Potential for Conflicts of Interest

Agency employees and consultants potentially violate conflict of interest laws and regulations by making decisions for which the local agency employee, or consultant acting on behalf of the local agency, could benefit financially.[1]

5. Improper Charge of Indirect Costs

You are in violation when you charge indirect costs without an approved Indirect Cost Rate from Caltrans Audits & Investigations. This also includes any Cognizant approved rates received by the Agency from someone other than Caltrans Audits & Investigations.

For selection and contracting procedures, refer to Chapter 10 of the LAPM and FHWA’s Consultant Services site. For additional information about construction contract administration, refer to Chapter 16 of the LAPM and the FHWA Contract Administration Core Curriculum.


  1. I listed examples of measures that can be taken to mitigate the potential for conflicts of interests HERE.  ↩

About David Giongco

David is a registered civil engineer with the Caltrans Division of Local Assistance. Learn more about him here and connect with him on Twitter and at LinkedIn.

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