Using Harm Statements to Defend Against Audits & Build Better Bids

Black swan events like the COVID-19 pandemic have saddled contractors with a variety of costs that were unforeseen when they won the bids for many projects. These costs included masks and personal protective equipment (PPE), sanitizing stations on jobsites, delays in project schedules, and even cancelled projects (see Exhibits 1 and 2). To document these costs related to the pandemic, contractors should use a harm statement. While contractors are not required to maintain a harm statement, it likely will become a future best practice.

Documenting Costs

All incurred costs related to COVID-19, whether they are direct to a project or indirect back-office costs, must be well-documented and isolated from ongoing normal business costs. Once documented in a harm statement, companies can:

• Demonstrate how COVID-19 has impacted the business (e.g., in the event that the company is audited for a Paycheck Protection Program (PPP) loan)

• Promote in qualifications statements how their comprehensive COVID-19 programs save lost productivity and mitigate construction delays

• Negotiate with project owners regarding the potential for sharing these costs

• Create more accurate future bids that take into account these extra costs

PPP Loans & Other Audits

Many contractors took out PPP loans to maintain payroll and cover regular costs of doing business when local economies shut down in early 2020. When taking the loan, contractors should have started documenting payroll and related business costs in the event the federal government audits the loan program. Since there is a six-year lookback period for PPP loan audits, a harm statement will be an important document for contractors to easily access. Guidance on the level of scrutiny based on loan size and probability of audit is very fluid, as a new stimulus program could change the environment, and the incoming administration will assess compliance through a new point of view.

Even if a contractor never applied for a PPP loan or received PPP funds, it may have incurred pandemic-related costs for public sector projects with federal, state, or local funding. A harm statement can help justify those costs in case any of these projects are later audited.

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About the Authors

Kurt Siebenaller

Kurt Siebenaller is Partner at Baker Tilly located in Southfield, MI.

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Anthony Ollmann

ANTHONY OLLMANN is Construction Risk Partner at Baker Tilly located in Madison, WI. Tony is responsible for construction risk management, construction controls compliance, and contract audit.

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