Cecelia Fadipe – FMCA

Open Book Accounting Overview

Open book accounting (OBA) plays a vital role in the procurement and delivery of government funded public sector as well as private sector funded infrastructure projects and construction contracts. The concept of OBA offers a clear transparent and independent view of people, systems, processes and controls in place for cost management, control and assurance of actual and defined costs to be reimbursed on target cost or cost based construction contracts.

Open book accounting helps by enhancing confidence, trust and collaboration between the contracting parties. Evidencing pre-agreed protocols used early on and throughout the project life cycle provides confidence and independent assurance to investors, clients and contractors on the effectiveness of processes and controls across the supply chain. The control processes include:

• Effectiveness of financial & commercial controls
• Accuracy of actual costs and planned forecast costs
• Evidencing value for money and sustainable value

Open book accounting is an important tool in understanding the actual cost of a project over the entire project life cycle. By allowing the parties to the contract to view all cost records, processes and systems.

Applying OBA principles during pre or post-contract cost risk reviews, cost assurance audits and implementing cost assurance protocols helps ensure alignment with the intention of the construction contract used by all parties in a contract or an alliance. During this process, ensuring that commercial, financial controls and protocols are in place and being adhered to does the following;

• Fosters mutual trust, collaboration & confidence
• Provides assurance of actual costs, risks & opportunities
• Prevents disputes, by mitigating cost risks early, building trust and healthy alliances

Open book accounting provides independent records and evidence based data that supports real-time commercial and financial decisions. It promotes healthy collaborative alliances, relationships and decisions making amongst funders, clients and suppliers. The additional detailed benefits of using OBA principles include;

• Early multi-party engagement to mitigate project risk, optimise cost, revenue and profit
• Contract changes and negotiations such as deeds of variations from fixed price lump sum to cost reimbursable contracts
• Final account agreements, alliances and dispute resolution amongst the parties

Related: Open book accounting supply chain

National Audit office Case study

A case study by the National Audit Office NAO revealed that based on a study of public and private sector projects, the NAO has identified the five approaches below for collecting contract cost data from suppliers and using contract cost data effectively.

• Ensuring that the price complies with the contract
• Making better informed commercial decisions early
• Assuring processes, systems and controls
• Maintaining control proactively and mitigating risks early
• Collaborating for achieving step-change innovation

NAO also found that these major contracts have a strategy for data collection and use of information and that the government departments concerned have a clearly communicated policies or contract clauses that identifies that they have the audit right to use open book accounting principles as and when required.

The NAO conducted survey disclosed that currently only 23% of government bodies have a policy stating when to use open-book accounting. We believe this will rise with ESG KPI disclosures.

Statistics

Reasons for cost overrun in construction projects worldwide, as of 2008

The graph above from Statista shows the most common reasons for cost overruns on construction projects around the world as of 2008. This data is based on a survey of leaders in the construction industry. 60 percent of respondents referenced material price escalation as a reason for cost overruns in a project making it the most commonly cited reason. The other reasons were followed by poorly defined scope of project (55%) and contractual disputes (40%). Such problems can be dealt by applying open book accounting principles early for the independent identification of risks as a result of the scenarios and issues mentioned in the graph. This will help the project and management team to ease up the process, reduce cost overruns and optimise opportunities by sharing actual cost data.

Our Tips on Open book Accounting

• Lead to a more honest debate about the costs and funding models
• Open book accounting offers transparent and procuring services
• OBA principles is seen as key to successfully driving efficiency on contracts
• Provides transparency and insight into supply chain pricing and profitability
• Opens up collaborative and innovative negotiations with commercial, legal, and finance functions
• Enhances confidence, trust and collaboration amongst the parties and multi-party alliances

Why Open book Accounting will be Vital in Future

• The principles promote collaborative behaviours between client and suppliers
• Leads to financial transparency and an overall improved performance
• Independent evidence to investors and stakeholders that the project or business is making profits and doing so sustainably
• Evidence that the company is paying invoices promptly in line with the fair payment charter to the supply chain
• Assurance of actual and defined costs for an equitable pain-gain-sharing formula
• Enhances transparency with ESG KPI’s and prevents greenwashing
• Vital for minimising disputes on cost based or target cost construction contracts, although this may be inevitable at times.

What to Avoid when Selecting a Construction and dispute Expert

• It is easy to expend considerable time sourcing experts and end up going down a rabbit hole in your search, especially on complex matters requiring multiple experts i.e. combined quantum and technical disputes
• Being too generalist about what expertise you need, for example, a mechanical engineering and plumbing (MEP) expert is sought but the matter may be purely an electrical issue – so you need to set your sights on a chartered electrical expert as opposed to an expert who is proficient in M&E disciplines
• 3rd party agents can assist in sourcing experts, but tread carefully and be aware this route can be expensive and limit fees to the expert, which in turn means the client may not get the best available resource. Also, multiple sources may end up “hawking” the matter, which can compromise and complicate the selection process
• Casting the net too wide – by speaking to multiple experts during the procurement process which can create confusion with opaque views and differing approaches, known as “Expert shopping”
• Try and avoid delays to selection and appointment. This may lead to the loss of an expert due to more pressing priorities

Limitations of Open-book Accounting

• Open book requires a cultural change in the organisation
• Requires skills unavailable in-house e.g., independent auditors
• Can be time, information and resource-intensive
• Open book being extended to other contracts excessively
• Being used for the wrong reasons e.g., to transfer risks
• Requires adapting and experience for each type of contract
• Excuse to not proactively manage significant project risks
• Requires target cost experience and commercial capabilities
• Requires openness, and a culture of trust and transparency
• Access to sensitive information could be met with resistance
• Safeguarding sensitive data from competitors and clients
• Exposes inappropriate aggressive price competitive practices
• Risks of disallowed costs, loss of fees and revenue
• Increased data and commercial risks if not robustly mitigated

References

• https://www.statista.com/statistics/526875/reasons-for-cost-overruns-in-construction-projects/
• https://www.nao.org.uk/press-release/open-book-accounting-and-supply-chain-assurance-case-studies-2/

What CFBL Consulting does?

CFBL consulting offers cost assurance audits and sustainable strategy consulting services. This includes an initial ESG assessment, X-ray view of actual costs to prevent or evidence greenwashing, impact reporting, payroll audit to safeguard equal pay and practical training on how to embed ESG KPIs into finance, commercial and project investment decisions. We identify, resolve, and follow through. By establishing ourselves as strategic partners, we govern and help implement sustainable strategies. Our roadmaps ensure that project plans are successful, as a result, we measure our success by yours.

 

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