The Complete Guide to Construction Audits

What is a construction audit?

Value of a construction audit program

Construction audit checklist

Construction audit RFP overview

How long does a construction audit take

Frequently asked questions about construction audit

Guide to construction audits video

A construction audit is a detailed review of a construction project's costs, processes, contracts, and performance to ensure that:

1. Financial Integrity: All amounts billed by contractors and suppliers are accurate, legitimate, and in accordance with the contract terms.

2. Contract Compliance: Both the owner and the contractor are adhering to the terms and conditions of the construction contract.

3. Efficiency: The project is being managed efficiently in terms of time and resources. Quality Control: The work performed meets the specified standards and any agreed-upon benchmarks..

4. Risk Management: Identifying potential risks and ensuring they're being managed properly. The audit can reveal overpayments, billing errors, inefficiencies, or even potential fraud.

A construction audit is like a deep dive into the specifics of a construction project's financials to ensure every dollar spent is accounted for and justifiable. It's a way to optimize the financial health of a construction project, just as you'd optimize the financial health of a business.

A construction audit is a valuable tool for anyone considering getting construction work completed.

In the past, owners were provided with lump sum invoices for the total value of the project. While this was a simple method, it didn’t allow them to understand the cost of every aspect of the project. It also made it impossible for them to determine the ROI being generated by the various construction features.

Now contracts are broken down to include design-build, cost-plus, guaranteed maximum price, unit price, cost-plus fee, and cost variable fee. There may also be incentives to see to it that the job gets done on time.

Staff additions can also add to cost increases. A construction project often involves more than the crew. You may also have to hire an architect, a concept designer, a preconstruction consultant, a construction manager, trade contractors, and procurement specialists.

The various aspects of invoicing and staff costs make it nearly impossible to determine how much your project will cost in advance. This makes it difficult to budget. It can be even harder to get a loan for your project.

A construction audit lets owners know how much they will be spending so they can budget accordingly. It also tells them the value of the loan they should be applying for.

What’s more, the audit identifies areas of risk. It determines cost savings to reduce your budget. It finds areas that can be improved for optimal efficiency.

Construction audit and accounting services ensure that your project is completed within budget and that risks are mitigated. Here are some things that will be included on the checklist:

• Areas of increased risk

• Accuracy of charges as compared to your contract

• Evaluating whether funds are being used in an intended manner

• Identifying areas of possible cost savings and increased ROI

• Identifying areas that need improvement for optimal efficiency.

• Identifying and following up on areas that require improvements or corrections.

• Ensuring the project is closed out promptly

Construction audit and services typically start with a construction Request for Proposals (RFP). The RFP asks audit companies to submit bids for their auditing services.

An audit committee may be needed to write the construction audit RFP. It should be written by a party that understands the function of the audit and the owner's needs.

It should explain:

• What the owner does

• What needs to be audited

• The auditing standards

• The expected format for the construction audit report

The duration of a construction audit varies based on several factors:

Size and Complexity of the Project: A small renovation project will require a much shorter audit than a large infrastructure project like a bridge or skyscraper. The more complex the project, the more time is needed to review all contracts, invoices, change orders, and other relevant documents.

Scope of the Audit: If the audit is comprehensive, covering all aspects of the project from contract compliance to quality control, it will take longer. On the other hand, if it focuses only on a specific area, like financial discrepancies, it may be quicker.

Availability and Organization of Records: If the project's records are well-organized and easily accessible, the audit process will be expedited. Conversely, if records are scattered, incomplete, or difficult to access, the audit will take longer.

Cooperation from Stakeholders: The responsiveness and cooperation of contractors, subcontractors, and other parties involved can impact the speed of the audit. If these stakeholders provide the necessary information promptly and are available for clarifications, the audit process will be smoother and faster.

Experience and Resources of the Audit Team: A seasoned audit team with adequate resources can conduct an audit more efficiently than a less experienced team or one that's spread thin.

Frequency and Timing: Some audits are conducted periodically throughout the construction process, while others might be a one-time comprehensive review. Periodic audits might be shorter but occur more frequently, whereas a one-time audit might be longer but only happens once.

Given these variables, we estimate that a construction audit can take anywhere from a few days to several months. For large-scale projects with comprehensive audits, it's not uncommon for the process to extend over several months. For smaller projects or more focused audits, it might only be a matter of weeks or even days.

What is a construction audit?

A construction audit provides a breakdown of what a construction project will cost considering the various aspects of the project and the necessary staff. It identifies possible risks and issues that can be addressed to make the project run efficiently.

Is your business at construction compliance risk?

A compliance risk is an organization’s potential to incur legal penalties and financial and material losses from its failure to comply with industry laws and regulations.

Many compliance risks could be incurred in a construction project. These include:

• Environmental Concerns: Your construction project could produce environmental concerns if the building is causing the destruction of natural habitats or involves the use of harmful chemicals or hazardous waste disposal.

• Process Risks: A process risk will happen if the contractor fails to follow an established procedure during the construction project. For example, they may use unapproved materials, go against zoning rules, or build in an unsafe manner.

• Workplace Health and Safety: Environmental and process risks can endanger your staff by going against the rules of the Occupational Safety and Health Administration (OSHA).

Construction audit and services ensure you are not running into any compliance risks.

What is the cost of a construction audit?

There is no one answer to the question, ‘How much will a construction audit cost?’ It depends on the scope of your project. But whatever you end up spending, it will be a worthwhile investment. Construction audit and services save you money and typically pay for themselves in the long run.

What are the benefits of a construction audit?

A construction audit offers many benefits including the following:

• It Helps You Save Money: A construction audit will save you from overcharges, mathematical errors, improperly allocated costs, incorrect fees, and unauthorized expenses.

• Better Service: When contractors see audit language in a contract, they know they will need complete records. If they are unable to provide those records, they will move on to easier work. Therefore, you will only get qualified contractors competing for your job. What’s more, if contractors know they are being audited, they will become more aware of mistakes and miscues.

• Better Financial Records: An audit will recognize areas where documentation is incomplete ensuring you end up with better financial records.

• Allows for Budgeting and Financing: Construction audit and accounting give you an accurate idea of how much you will be spending on your project so you can budget and/or apply for loans accordingly.

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