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Hospital Audit Questions New Construction Costs

POSTED May 9, 2012 12:31 a.m.

An independent audit done at the request of Oak Valley Hospital CEO John McCormick earlier this year has identified $689,106 in questionable costs and $30,043 in unsupported costs for the new hospital construction project.

McCormick said the audit, performed by Moss-Adams of Seattle, revealed that the costs were not allowed by their construction agreement with ACME Construction of Modesto and the project manager, Jacobs Engineering headquartered in Pasadena. Jacobs Engineering is responsible for reviewing billings from ACME for compliance, proper billing methods, and adhering to the contract.

“Most of this happened way before I came aboard,” said McCormick who was hired as CFO a year ago and took over as CEO in November 2011. “I found no evidence that this was caught or ignored by the prior administration.”

The most glaring of the illicit billings are $584,736 identified as overbilled charges not actually incurred by ACME or Jacobs but still charged to Oak Valley Hospital District.

According to McCormick, these billings consisted of a variance in the method of actual work done versus completed projects. ACME’s invoicing was billed on a percent-complete basis and not actual costs incurred even though all of the ACME payment applications were approved by Jacobs Engineering and the hospital. McCormick predicted that all costs would be reconciled by the final billing of the project.

“In essence, we were paying them faster than we had to,” said McCormick. “It was nothing deliberate, just human error. Jacobs has been a very good partner in this project.”

Much of the inconsistency had to do with approximately 200 days of billing delays that were charged by ACME. Delayed days are a normal course of construction.

“At this time I cannot say if those days are legitimate,” said McCormick. “After the project is done, we’ll determine if those charges were warranted.”

Another questionable cost was over $20,000 paid as employee bonuses charged to the project. Under the terms of the contract bonuses are not allowed. That money will be paid back.

Other matters discovered by Moss-Adams were $30,043 in unsupported costs lacking the proper support or backup to verify allowable charges. The majority of this amount, $28,777, was for contractor equipment rental claims that lacked documentation.

McCormick said that the discrepancy in billing led to him contacting Jacobs Engineering headquarters.
“Jacobs Engineering was very sensitive to the concerns of the customer,” said McCormick who asked for Jacobs area management to come out to Oak Valley Hospital. “Jacobs made some management changes and we now have a much higher level of sophistication with this management team.”

McCormick said that in his experience large construction projects frequently have in-process audits on a regular basis as a good business practice. He clarified that in this case the audit noticed things were not correct, it was brought to the attention of those responsible, and matters are being corrected or will be corrected by the anticipated summer opening of the new hospital.

McCormick estimated that the new construction project is currently about $1 million more over budget than he initially thought.

“My concern right now is not so much being over budget,” said McCormick, “but it is dollars out of my pocket that I have to justify to the community.”

Once the new construction is completed, Moss-Adams will be back to conduct another audit to ensure everything has been reconciled and is in line with the contract.

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