September 16, 2004

1. MEMORIAL HERMANN HEALTHCARE SYSTEMConstruction, Real Estate and Support Services (CRESS)Capital Construction Project Accounting and Financial ReportingMarshall HeinsMichael HattonAdam LaneDavid WilkersonCathy AdamsPaul Shearon September 16, 2004

2. Summary of Capital Project Process • Approval of Quarterly Capital Project Requests • Initiation and Activation of Approved Budgeted Projects • Project Budget Changes • Unbudgeted Projects • Purchase Order Processing • Invoice Processing • Tracking of Project Budget, Commitments and Expenditures • Closing Completed Projects

3. Capital Expenditures- Defined • Capital projects including space changes or major building repair (those which extend the life of the building) with costs in excess of $5,000 (not including equipment) and a useful life of two years or more • Equipment associated with capital projects which individually or grouped cost $1,000 or more, having an estimated useful life of two years or more. This is the only instance where assets may be grouped to reach the capitalization requirements.

4. Approval of Quarterly Project Requests • CEO/VP and CFO of facility/originating department submit routine quarterly list of capital construction project requests to President’s Council for review • President’s Council approves list of projects and returns signed copies of the lists to the originating facility and CRESS • CRESS Sr. Financial Analyst compares individual project requests documented on CCRs to approved project list to ensure budget funds were approved

5. Example of Listing of Routine Quarterly Capital Projects Approved by President’s Council(Construction Projects Only)

6. Initiation of Projects • Capital projects are to be coordinated through the Construction, Real Estate and Support Services Department before work begins if costs $500,000 or greater; on site facility manager if less than $500,000 • MHHCS Corporate Policy Number FIN-00009 • Staff with specialized background in architecture and construction • Existing vendor relationships and economies of scale • OSHA, ADA and other regulatory considerations • System Best Practices

7. New Project Approvals

8. Activation of Individual Budgeted Projects • Project Manager completes the CCR (Capital Construction Request) form, signs it and obtains signature of facility CEO. CCR expenditure categories can be tailored for specific project needs • Project Manager forwards CCR to CRESS Sr. Financial Analyst who routes for additional approvals in accordance with policy • After all approvals obtained, CRESS Sr. Financial Analyst activates project and sets up budget worksheet • CRESS Sr. Financial Analyst submits CCR to Corporate Accounting for entry into Lawson accounting system • Purchase orders cannot be issued and invoices cannot be paid until the project is activated in Lawson • We recommend that project managers prepare purchase requisitions for all blanket purchase orders as soon as possible after activation (construction contractor, architect, engineer and consultants for example) • Unused funds must be returned to MHHS and cannot be used for expenditures not specifically included in approved project budget unless approved by the Vice President of CRESS and the President’s Council

9. CCR Form- Page 1

10. CCR Form- Page 2

11. Unbudgeted Projects • Proposed projects- Investigative Expenditures • Incurred to assess feasibility of proposed project • Project manager initiates PRF form, obtains same approval signatures as CCR, but PRF also requires Executive approval (see signature authority levels slide) • PRF sent to CRESS Sr. Financial Analyst in same manner as CCR • Projects Ready to Proceed • Use CCR and follow same process as budgeted project, but Executive approval required (see signature authority levels slide)

12. PRF Form

13. Budget Changes • Two categories of budget changes: • Scope Changes- project scope changes requiring additional funding. Use Scope Change Order form (SCO). Same approval and routing process as CCR, except additional Executive approval required- SCOs greater than $50,000 require President’s Council Approval, those less than $50,000 require approval of VP of CRESS. For scope reductions, funds should be taken out of all applicable line items. • Deductive Scope Changes- occurs when scope and funding of project is reduced. Use SCO form and obtain same approvals as CCR (VP of CRESS must approve use of funds that are placed into contingency). • Hidden Conditions- a hidden condition is discovered such as asbestos abatement that could not have been anticipated prior to commencement of project. Use Hidden Condition Change Order form (HCCO). Follow same approval and routing process as CCR, except additional Executive approval required. Hidden conditions must be paid from contingency funds only (contingency funds are included in certain project budgets for unanticipated occurrences).

14. Budget Change Approvals

15. SCO Form- Page 1

16. SCO Form- Page 2

17. HCCO Form- Page 1

18. HCCO Form- Page 2

19. Purchase Order Processing • Project budget must be approved and activated in Lawson before PO can be issued. • Project manager prepares a purchase requisition that must be approved in accordance with PO approval levels • Project manager forwards completed and approved purchase requisition to CRESS Financial Analyst who reviews budget and routes for approval signatures • CRESS Financial Analyst sets up PO in Lawson and records PO in CRESS database • Pink copy of purchase requisition goes to project manager who sends a letter to vendors to communicate contact information, billing procedures • Project Manager will be vendor contact for all vendor inquiries • RUSH POs- Project manager should clearly indicate rush orders on the Purchase Requisition

20. Contracts and Proposals • Contracts required for construction services • Require same approvals as Purchase Requisitions and Invoices • Requires additional review of VP of CRESS (CRESS Financial Analyst will forward for legal review) • Project Manager must: • Obtain three originals of contracts, construction change orders and change directives (one for contractor, architect and CRESS) • Verify that budgeted funds are available • Prepare purchase requisition, enter the PR into the PR log, and attach original contracts, construction change orders and change directives and forward to the Financial Analyst for processing. • The Financial Analyst will: • Verify budget • Route contract/CO/CD for appropriate signatures • Return two signed, executed copies of the contract/CO/CD with the pink copy of the purchase requisition to the project manager (who will distribute to the architect and contractor).

21. Contracts and Proposals- Continued • Proposals required for architect services, consultants, Medical Equipment Planners (MEPs), graphics • Project Manager will obtain two originals of consultant proposals (one for consultant, one for CRESS) • Proposals should include estimated reimbursable expenses which are to be documented on purchase requisition • Require same approvals as Purchase Requisitions and Invoices • MEPs- proposals should include performance standards

22. Purchase Order Approvals

23. Invoice Processing • Project budget must be approved and activated in Lawson before invoices can be paid. • Vendor sends invoices to Project Manager • Project Manager verifies PO#, project # authenticates and signs invoice and sends to CRESS Financial Analyst • CRESS Financial Analyst: • Verifies PO balance • Routes for approvals • Logs in CRESS database • Sends to Accounts Payable for payment • Accounts Payable generates checks on Tuesday and Friday • Project Manager will be vendor contact for all vendor inquiries • Rush Invoices- process in same manner as rush PRs

24. Invoice Processing- Continued • Short Pays- Invoices will not be short paid except for taxes

25. Invoice Approvals

26. Tracking of Project Budget, Commitments and Expenditures • Project manager records approved purchase requisitions and invoices into budget tracking worksheets provided by CRESS Sr. Financial Analyst • CRESS Sr. Financial analyst will input all budget data into budget tracking worksheet from CCRs, PRFs, SCOs and HCCOs • Project manager records purchase requisitions into project purchase requisition table and forwards to CRESS Financial Analyst. • Project manager should verify if budget funds available before submitting purchase requisitions to Financial Analyst. • If budget change needed (SCO, HCCO), attach it to the corresponding purchase requisitions and send to Sr. Financial Analyst who will make the necessary budget changes • Project manager records invoices into invoice table and forwards to CRESS Financial Analyst • Do not input data directly into managerial project budget summary worksheet because it contains formulas to calculate total budget and commitment amounts • Project manager uses the managerial project budget summary worksheet as a tool to track budget vs. inception-to-date commitment amounts • Timely maintenance of budget tracking worksheet will enable project manager to have up-to-date financial data on the project

27. Project Purchase Requisition Table

28. Invoice Table

29. Managerial Project Budget- Summary Worksheet(Do Not Input Data Into This Worksheet)

30. Project Closures • CRESS Sr. Financial Analyst monitors Monthly Financial Capital Report for completion dates, follows up with project managers regarding project status • Project manager notifies CRESS Sr. Financial Analyst that a project will be closed • CRESS Sr. Financial Analyst sends letters to vendors requesting that they submit all outstanding invoices on the project for review and payment • CRESS Sr. Financial Analyst prepares project closure form and routes for signatures to project manager and VP of CRESS • After project closure form completed and approved, CRESS Sr. Financial Analyst sends form to Corporate Accounting where project is closed and transferred to fixed assets. • CRESS Sr. Financial Analyst will notify facility CFO after project is closed • After a project is closed, no additional expenditures can be charged to the project.