The pandemic has created significant supply chain disruptions for manufacturers and construction project managers – particularly with rising material costs. Our client, a well-known construction management firm leading a major commercial airport project, had agreed to a delivery contract with a supplier for key equipment facilitating passenger movement throughout the airport. The delivery lead time between executing the bid and delivery of the product was almost two years, due to the specialized nature of the project and supply chain issues in effect at the time.
The delivery of construction materials was delayed almost two years after the signed delivery contract, amid a 40-year inflation occurring throughout the U.S. Between the time of the execution of the fixed price contract and the time of product delivery, the U.S. experienced the highest level of inflation seen in over 40 years. The supplier reached out to our client to renegotiate the contract, as the current market conditions significantly impacted the feasibility of the project. The supplier had requested a construction change order equaling millions of dollars to align with inflated costs.
Our client, the contractor, sought out Baker Tilly’s experienced professionals to conduct a review of the supplier’s claims in a timely manner to resolve the dispute and keep the project on schedule.
Baker Tilly was engaged to provide an independent analysis assessing the supplier’s cost fluctuation claims to share with both parties. Our team of experienced manufacturing advisory professionals specializing in Dynamic Costing® quickly responded to the request by discussing the specific facts and challenges of the project with the supplier. Baker Tilly traveled to the supplier’s manufacturing headquarters and conducted a walkthrough to gain an understanding of their manufacturing process and validate claims of increased manufacturing overhead and labor costs.
Baker Tilly developed an approach incorporating a combination of documentation review, data analysis and inquiry of the supplier’s management team to develop an understanding of the key drivers of the inflation asserted by the supplier. We then reviewed specific transactions and reconciled the details from invoice source documents to validate the increases noted in the system calculations of the supplier. Results of this testing were noted in the final report.
Because timeliness of the data was a critical factor in this engagement, Baker Tilly deployed a pareto approach to the cost inflation by prioritizing the key drivers first and working through details.
Through the procedures performed, we confirmed that cost inflation had occurred when compared to cost levels assumed or known at the time of the bid in 2020. However, our analysis concluded that the supplier had sought over $1 million of additional expense that would not be typical costs for a manufacturer to claim under well-established costing principles in the industry and the guidance of the engagement.
Baker Tilly’s independent position and industry expertise allowed us to play a critical role as an intermediary for multi-billion-dollar entities seeking to resolve a dispute through facts rather than lawyers. We provided an objective approach with unbiased communication to obtain a mutual agreement allowing a fair negotiation and final settlement that kept the project on schedule at an acceptable level of cost for both parties.
