The Ultimate Guide to Construction Audits: What Project Owners Need to Know

What Is a Construction Audit?

A construction audit is a detailed review of a project's contracts, costs, compliance and performance to help project owners, developers and stakeholders identify and address issues like cost overruns, contract noncompliance and project cost risk management. Construction audits are part of construction project cost advisory services, which help you manage costs from planning through project completion by making sure contracts protect the owner and are followed, unnecessary project costs and expenses are avoided and potential savings are recovered.

In this comprehensive guide, we'll cover:

• What Projects Can Benefit From a Construction Audit
• Reasons to Undertake a Construction Audit
• When to Do a Construction Audit
• Types of Construction Audits
• Construction Audit Challenges
• Requirements for a Construction Audit
• Process for a Construction Audit
• Construction Audit Best Practices

What Projects Can Benefit From a Construction Audit?

Construction audits are ideal for organizations embarking on any large capital project. Some typical examples are:

Reasons to Undertake a Construction Audit

Ultimately, an audit protects a project’s budget integrity and helps you deliver a successful outcome.

• Verify and control costs: Ensure that costs charged to a project are not in error or duplicated and match contract terms, preventing overcharges.
• Stay on budget: Identify discrepancies between actual spending and budgeted amounts.
• Prevent fraud: Detect signs of overcharging or dishonest billing.
• Ensure contract compliance: Verify that all contract requirements are met, including prime contract agreements and subcontract agreements.
• Improve efficiency: Streamline processes in payment applications and billings to make sure resources are used effectively.
• Avoid disputes: Ensure all parties meet their contractual obligations, reducing potential conflicts or legal issues.

When to Do a Construction Audit

The earlier you engage a construction auditor, the better. Ideally, project owners should seek out a construction audit before a shovel hits the dirt.

There are potential risk areas that warrant an audit in all phases of a project: preconstruction, construction and at project completion/closeout. Engaging an auditor throughout the entire project lifecycle can help you maximize your cost avoidance and cost recovery.

Types of Construction Audits

There are numerous types of construction audits, each addressing different aspects of a project. These audits can be conducted individually or combined, depending on your needs. Some audits may span multiple phases of the project lifecycle.

Pre-construction

Making sure owners are protected and understand their risks prior to construction is key. In this phase, the construction auditor may focus on:

• Construction contract assessment
• Project risk assessment
• Comparison of labor billing rates to industry and regional standards
• Estimation of reasonable appropriation for tax burden and labor fringe costs
• Estimation of reasonable appropriation for insurance, small tools, etc.
• Establishment of an appropriate contract payment application structure, allowing for effective periodic reviews

Construction

Ensuring that owners don’t pay too much and realize cost savings and recoveries during the project is essential. During this phase, the auditor may focus on:

• Payment application review
• Change order review
• Assessments of contingencies and allowances
• Validation of labor costs and material purchases and identification of non-compliant charges
• Subcontractor bid and award recommendation assessments
• Analysis of equipment lease billings
• Reconciliation of actual costs to estimated costs and validation of duplicate charges

Closeout

A final project cost reconciliation is critical. In this phase, the construction auditor conducts a detailed review of all project costs to verify that all costs charged to the owner are accurate, reasonable and comply with contract terms.

Other services to consider

In addition to a construction audit, project owners can benefit from other construction project cost advisory services throughout the project life cycle, including:

• Process improvement consulting
• Procurement and labor rate assessment
• Relocation and travel expense assessment
• Project management support
• Project cost control assistance

Construction Audit Challenges

Common challenges associated with construction audits include:

• Mountains of paperwork: From contracts to payment applications, construction projects generate significant paperwork.
• Complex and costly change orders: Managing and auditing frequent change orders can be tedious and time consuming , especially when these changes impact budget and timelines.
• Lack of standardization: Different project owners, contractors and subcontractors may use varying systems and processes, complicating the audit.
• Records and documentation: Records and supporting documentation can be inconsistent, missing or incomplete.
• Fraud detection: Identifying fraud in large, complex projects can be difficult because of the number of moving parts, making it easy for unauthorized charges or errors to go unnoticed.
• Time and resource constraints: Conducting a detailed construction audit requires time and expertise, which can strain a project owner’s internal resources if not properly managed.

Having experienced auditors and a solid process in place will help you navigate these hurdles with minimal stress.

Requirements For a Construction Audit

For a smooth, successful construction audit, you need to prepare specific documentation and understand the key requirements of the audit process. Here’s what to provide the auditor:

• Contract documents: Include all contracts and exhibits, change orders, amendments and any agreements made with contractors, subcontractors and vendors. Auditors will review these to ensure compliance with terms and pricing, and to assess overall cost risks.
• Project schedules and cash flows: Original and updated schedules and cash flows are needed to track progress and delays. This helps auditors assess whether the project is on track or there are significant deviations that need attention.
• Cost records: Provide complete records of all contractor general conditions charges, staff and trade labor, equipment (rentals and purchases), material and subcontractor costs.
• Progress reports: Contractors should be required to provide regular (ideally monthly) reports that detail the status of the project, including schedule updates and milestones achieved, current budget, committed costs, anticipated costs and any other challenges affecting the schedule and budget.
• Subcontractor information: Provide copies of subcontractor bids and subcontract agreements.
• Change orders: All approved and pending change orders, along with their impact on the budget and timeline, need to be fully documented, including all supporting back-up for auditor review.
• Risk management reports: If the project has risk assessments or mitigation strategies, these should be shared. Auditors will assess how well risks are being managed and whether potential threats are controlled.
• Communication logs: Logs of important correspondence, meeting minutes and critical decisions can give auditors insight into the decision-making process and project adjustments.

• Records availability: Documentation should be organized and easily accessible to auditors.
• Timeliness: Ensure records are up-to-date and accurately reflect the current state of the project.
• Stakeholder engagement: Key personnel involved in the project, such as project managers, financial personnel and contractors, should be available to provide clarification or additional information.

Process for a Construction Audit

1. Initial planning and scoping
   Auditor: Defines audit objectives based on owner needs, scope and timeline based on the project's size and complexity.
   Project Owner: Provides all necessary project documentation (contracts, financial records and schedules).
2. Document review
   Auditor: Reviews contracts, invoices, cost records and compliance documentation to assess accuracy and identify potential issues. Creates an overall project risk assessment as necessary.
   Project Owner: Ensures timely access to all required documents, especially the contractor deliverables, and facilitates communication with relevant stakeholders.
3. Fieldwork and data analysis
   Auditor: Conducts site visits (optional, depending on scope) to verify physical progress, check compliance and confirm that project timelines are being met. Analyzes cost data to identify discrepancies, cost overruns or non-compliance.
   Project Owner: Coordinates site access and arranges for key personnel to be available for inquiries. Addresses any questions or provides clarifications during the analysis.
4. Audit findings and reporting
   Auditor: Compiles an audit report (or audit issues log) detailing any issues found, cost-saving and recovery opportunities and recommendations for improvement.
   Project Owner: Reviews the findings and collaborates on any required corrective actions. Implements the necessary changes based on the audit findings and monitors for continued compliance.

Construction Audit Best Practices

Below are eight best practices for ensuring a smooth, successful construction audit.

1. Examine contracts: Ensure every contract has an audit clause.
2. Define clear objectives: Establish what you want to achieve with the audit, such as cost savings, compliance assurance or risk reduction. This will help auditors focus on the most critical areas.
3. Keep detailed documentation: Maintain accurate and comprehensive records of contracts, invoices, change orders and schedules. Well-organized documents make the audit smoother and faster.
4. Conduct regular audits: Don’t wait until the project is over. Start with a pre-construction assessment and schedule periodic (monthly or quarterly) audits throughout the project lifecycle to catch potential issues early and stay on track.
5. Engage experienced auditors: Choose auditors who focus on construction projects and have construction project management experience. Their expertise will help uncover issues specific to your project.
6. Closely monitor change orders: Ensure that all change orders are proper, adequately documented/detailed, approved and justified. This will help you prevent unnecessary additional costs and keep your project within budget.
7. Ensure communication transparency: Keep open and consistent communication with your auditors. This includes making key stakeholders available and promptly providing any required information.
8. Prepare for corrective actions: Be ready to act on audit findings. Whether it’s recovering overcharges or improving processes, timely action is crucial for maximizing savings and cost recovery.

Is Your Construction Project at Risk?

Don't let hidden costs or project inefficiencies derail your construction budget or timeline. A construction audit can help ensure cost accuracy and project success (our audits typically help clients save from 1-3% or more on overall project costs). See how an audit helped this hospital recover over $850K in costs and learn more about how our Construction Project Cost Advisory experts can help you protect your investment in every phase of your project.