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Ensuring Compliance with Effective Construction Audits

Yancy Lassiter
Published Aug 29, 2023

Simply put, construction audits are a thorough, independent review of a project’s performance, data, and documentation to ensure that the contractor is managing the job in accordance with the contract. The typical audit reviews various facets of a project, verifying that costs and progress remain in line with the construction contract. It’s also a vital step for ensuring that jobs stay on track and within budget.

Construction audits help control costs and mitigate related disputes by assuring all cost-related issues follow the established budget and are in compliance with the terms of the contract. It also helps ensure that projects follow their established timelines and milestone schedules. The construction auditor will often perform an on-site review of job progress in order to determine project status relative to the agreed-upon timeline and detail whether the job is ahead, behind, or on schedule.

Other benefits of construction audits include the capture and recovery of overbillings or underbillings, cost reductions for project owners, potential fraud detection, and improved efficiencies on future jobs. They also serve to inform all stakeholders and team members of current project progress and performance.

Construction audits often occur at the completion of project milestones as defined in the Schedule of Values or related documents. They form a frequent part of the billing and invoicing process, as audits are typically ordered by the project owner or lending institution prior to the release of payments.

Understanding Audit Requirements

Construction audits examine a contractor’s financials on a particular project. They typically include verifying that completed portions of the job are in compliance with contractual obligations. This often requires the inspection of materials to ensure they meet agreed-upon quantities and specifications. The construction audit process also demands the review of all related documentation and vendor invoices to make certain they align with a contractor’s billing.

Preparing for an Audit

It’s essential for contractors to prepare appropriately for any pending construction audits. Maintaining well-organized financial documents, copies of any change orders, and receipts for all project-related purchases is critical. It’s also important to show evidence of compliance with all applicable building codes and regulations on the project.

Other steps contractors should take to be prepared for construction audits include proactively negotiating audit terms and provisions before finalizing the project’s contract. It’s also a good idea to ensure ongoing and collaborative communication between all parties, including the auditors. It’s equally important to take prompt action on any areas requiring attention, making sure to communicate as necessary with team members, subcontractors, and vendors to ensure compliance with contractual obligations and meet the ultimate expectations of the project owner.

Internal Control Systems

The construction audit process helps improve internal control systems, primarily by ensuring that project managers are performing their job properly. Audits can help make certain that the project plan is followed correctly, that all team members are performing their assigned tasks, and that safety concerns on the job are addressed, with proper corrective measures put in place as necessary.

Audit Procedures and Processes

Construction contractor audit processes and procedures typically focus on several aspects of a project. Billing and construction costs are constantly monitored to ensure the project remains on budget. The actual job site may also be reviewed, providing the auditor the opportunity to offer suggestions or requirements for streamlining the project and improving costs.

The audit process also includes contract review related to risk management and helps ensure compliance with the contract and project design. It also serves to validate documentation related to contractor expenses and verify the accuracy of all calculations related to job costs.

Identifying and Addressing Audit Findings

It’s vital that contractors understand common construction audit findings and how to adequately address them. Typical findings as a result of a construction audit include uncovering poor documentation and missing building requirements that could result in change orders and increased costs. Audits also reveal any calculation errors or inflated prices that could lead to overruns, like exaggerated material quantities or pricing, missing credits, or any other instances of overbilling.

🔎 Dive Deeper: The Ultimate Guide to Construction Accounting for Contractors

Streamlining Audit Processes with CrewCost

Successful contractors rely on available tools and technology to ensure they’re prepared for construction audits. Among the best construction software solutions is CrewCost, designed exclusively for contractors by construction industry experts and accounting professionals.

CrewCost’s document management functionality helps simplify and automate tasks associated with invoicing, billing, and payments. It also ensures the accurate tracking and allocation of labor and other project expenses, as well as the efficient capture and management of change orders. CrewCost also provides easy online bank integrations.

CrewCost delivers accurate data and real-time reporting in a 100% cloud-based application. CrewCost is the solution contractors need to streamline their construction accounting and ensure they’re ready for their next audit. Try CrewCost construction accounting software for free today and get better insight and improved profitability on your next project!


Author
Yancy Lassiter

Yancy Lassiter, a CPA with a degree from the University of Texas, has 12 years under his belt as a Controller and CFO in the construction industry; he’s your go-to guy for finance in the building industry.

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