Practical Consideration for Audits in Gaming Construction
Expert Insight provided by: Ronald L. Williams, Partner, Fox Rothschild

The gaming industry places a premium on “fast-track” construction that is both timely and cost-effective. Timely and cost-effective construction ensures the opening and expansion of facilities to generate revenue justifying construction costs. Fast-track construction in the gaming industry requires project design on a dynamic basis involving both the design professional and contractor working hand in glove to arrive at project scope, price and duration. Yet dynamic design frequently leads to construction costs that are variable, not fixed. When faced with variable costs, the project audit has an important role in monitoring construction cost to ensure proper billing and payment. Consequently, in formulating and negotiating contract provisions, an owner and the contractor must focus on audit provisions not just between themselves but also between the contractor and key subcontractors. An owner must haveexperienced personnel or retain an audit firm before negotiating the contract to obtain the benefit of a proactive approach to the audit. Then, the focus for a successful audit rests on negotiations, project administration, the post-construction audit and proper flow-down provisions. 

Audit Considerations in Contract 
Negotiations for Gaming Projects
An owner’s understanding of the audit process and its potential pitfalls depends on their own experience, as well as the knowledge of their personnel, including internal audit members and external auditors. Negotiations, which like the audit itself,need not be adversarial negotiations, can be educational for both the owner and any representatives involved. At the outset of contract negotiations, a contractor must completely understand the owner’s audit process expectations. 

For example, 
gaming owners may think that the scope of an audit is broad and the likely “return” that will be produced is more significant than construction experience demonstrates. Depending upon the type of contract (e.g. guaranteed maximum price or cost-plus), the items subject to audit may or may not be limited. Gaming owners may develop a perception that a given type of contract will enable a greater “recoupment” of monies paid to contractors and by necessity subcontractors. Frequently, other factors such as the existence of a project labor agreement, and the method of calculating, general conditions, general requirements and subcontracts for construction of gaming facilities can affect the scope and impact of the audit.

Construction audits can be oversold 
to participants in gaming industry construction as a way to recoup money after a project has been successfully completed. Rather than dismiss or ignore this possibility, a wise approach in negotiation is to have a frank and detailed discussion about the scope of the audit, what is not going to be audited, what processes will be implementedduring construction to monitor costs and expenses and the paper trail that needs to be generated. An audit can have value for all parties. But to maximize that value, all parties much understand each other’s expectations and ensure that the contractual language reflects those expectations. Through these negotiations, the parties can identify what is and isn’t feasible, avoiding subsequent disappointment. An audit can meet gaming owners’ expectations if the negotiations and the audit provisions in the contract fully delineate the scope, documentation andaudit process. This negotiation naturally should lead to a discussion of project administration, the second area of focus.

Audit Considerations During 
Project Administration Given the Pace of Construction
With fast-track construction, the parties should recognize the need for effective, efficient processing of payment applicationsto maintain an accelerated construction schedule. Comprehensive, concise communication between the parties is critical to success. To that end, if the owner plans simply to make payments and wait until the project is completed to conduct the audit, the contractor should anticipate the practical considerations involved in that approach. By the time of the audit, the contractor will have already paid subcontractors partially if not in full. If the owner expects to examine those payments and payment applications at the end of the project, the contractor would be wise to provide documentation during construction, confirming the adequacy of the documentation for current payments but also the audit. Otherwise, depending upon the language in the contract, the owner may have the right to require production of additional documentation, which, after project completion, can be time-consuming and costly. Depending upon the nature of the project and the scope of the subcontractors’ work, much of the documentation the contractor may need to provide is that of subcontractors. Obtaining that documentation during the project from subcontractors is much easier and less expensive than after it’s completed. Frequently, field personnel, especially in the area of general conditions, do not understand or truly appreciate what documentation they need to generate to avoid confusion or a dispute later on. If the owner has a contractual right to withhold payments until it has satisfactory documentation, the contractor needs to make sure that it is providing all the documentation in a timely fashion. This maximizes the contractor’s likelihood of retaining the monies paid by the owner.

Audit After Project Completion
 of Fast-track Construction in the Gaming Industry
If the owner plans to conduct the main portion of its audit after the project is finished and any portion of payment is dependent upon the audit’s satisfactory completion, the contractor should make sure that it and its subcontractors have provided the owner with all necessary documentation in a timely fashion. Failing to do so could delay the final payment. Ideally, by the time the project is complete, the contractor, through its designated representatives, will have provided all of the documentation contractually required not only for a satisfactory audit but to give the owner and its representatives confidence that all costs and expenses have been incurred in accordance with the contract. The contract should delineate audit processes and dispute resolution methods in the contract and the ability to meet promptly. It is in the contractor’s interests to satisfy an owner’s reasonable expectations in an audit. If an owner finishes a project, confident that all expenses were properly documentedand commercially reasonable, it strengthens the owner-contractor relationship for future gaming projects.

Subcontractor Flow-Down Provisions
 Contained Within Gaming Industry Subcontracts
For a contractor to successfully build its relationship with the owner and avoid disaster in an audit, the contractor must have appropriate flow-down provisions to its subcontractors. Those flow-down provisions should ensure that each subcontractor timely provides all documentation contractually necessary for prompt processing of payment requests. The flow-down provisions must also ensure that the subcontractors understand the importance of compliance and the need to be continuously diligent in providing documentation needed for project closeout and timely conclusion of the audit. To that end, the contractor must communicate those expectations as well as the ramifications for noncompliance to each subcontractor. These messages are communicated most effectively in a positive, constructive fashion, rather than as heavy-handed criticism. To succeed, especially with subcontractors, the contractor must communicate the economic structure of its contract with the owner. Otherwise, a reasonable subcontractor may think that the audit provisions that flow down are simply being used to obtain economic advantage for this project or perhaps future projects. Through timely and constructive communications, contractors can help subcontractors understand the goals that are being achieved through the audit process and the need for accurate, detailed documentation. Otherwise, the subcontractors may not have the documentation needed to respond to an audit, leaving the contractor vulnerable to a claim by an owner. That claim at best sours the relationship. At worst, the claim leads to a dispute that is avoidable.

Ultimately, timely completion of fast-track construction projects represents the number one goal for both a gaming industry owner and contractor. An audit can support the construction, but it cannot and should not distract project participants or slow down construction. To avoid expenditures on an audit that are misguided, retention of an experienced auditor that understands construction audits is important. Likewise, contract negotiations, including flow-down provisions must be memorialized to reflect the audit procedure. The audit itself, both during project administration and after project completion, must be focused, appropriate and targeted. If these considerations are communicated, memorialized and implemented, the project will be successful in all respects, including the audit.
Ronald L. Williams is a Partner and Co-Chair of the Construction Law Practice at Fox Rothschild LLP. He focuses his practice on construction litigation and the negotiation of construction contracts. He can be reached at [email protected].