This article was updated June 29, 2022.
Construction projects can be risky, but organizations could recoup investments of time and money by leveraging knowledge and objective feedback provided by qualified, experienced construction auditors.
Below, explore common questions related to these audits, potential cost-savings, and what criteria to look for in an auditor.
What Is a Construction Contract Audit?
Construction contract audits provide objective analysis to assist stakeholders and contractors with information they need to:
- Improve performance and operations
- Reduce noncompliance costs
- Facilitate decision-making
- Contribute to public accountability
Construction audit objectives should be clear and concise and address various performance aspects of the program.
Factors Assessed by a Construction Contract Audit
Factors that could come under consideration during a construction contract audit include:
- Contractor and subcontractor charges
- Schedule, scope, and quality management
- Project funding and plan alignment
- Project controls, including contract administration and procurement
- Compliance with regulatory requirements
- Budgetary management and financial reporting
- Program staffing gaps and redundancies
- Master plan development and scope prioritization
- Change-order controls
- Project close-outs
- Communication among stakeholders
The Government Accountability Office (GAO) issues the generally accepted government auditing standards (GAGAS)—also known as the Yellow Book—which provides construction performance auditors with standards and an understanding of how to apply them to complete audit objectives.
The American Institute of Certified Public Accountants (AICPA) is the national professional organization for Certified Public Accountants (CPAs) in the United States and its consulting standards can also be used to help meet the needs of an organization.
Why Is It Important to Hire a Construction Auditor?
Construction auditing projects, in accordance with contract or legal requirements, requires an auditor with a unique skill set and the ability to:
- Assess project risks
- Identify opportunities to strengthen controls
- Introduce best practices for efficient, effective, safe, and transparent projects
Stay Ahead of the Effects of COVID-19
As the COVID-19 pandemic continues to impact the construction industry, controlling budgets and properly managing projects is exponentially more difficult, for both owners and contractors. Projects are subject to constantly evolving work situations, which can translate into costly change orders and schedule increases.
Additionally, expertise in construction programs and the related controls aren’t typically core competencies for organizations such as public entities, which can lead to expensive errors and oversight.
A significant way to keep projects in check is to engage with an experienced construction audit firm to help you develop and conduct tailored, value-added audits.
Broaden Your Construction Audit Quality Objectives
Not all construction audit quality objectives are designed to result in improved efficiency and a reduced business risk. Some construction contract audits are designed to simply validate what contract charges are within the total construction budget or the scope of projects included within the approved master plan.
This limited-scope approach doesn’t take advantage of a comprehensive construction contract audit’s power. Audit objectives should be broad enough to provide information to help empower the organization to reduce risks, strengthen controls, and enhance overall performance.
3 Contracting Strategies for Construction Audit Projects
Projects provide exciting opportunities for growth and prosperity, but they can also present significant challenges. Implementing smart contracting strategies along with clear tax strategies can be critical for managing the following:
- Cost compliance
- Stakeholder expectations
Specifically, contracting strategies should include the following:
- Competitive bidding procedures
- Selecting the right contract
- Strong cost-of-work definitions
1. Competitive Bidding Procedures
It’s important to obtain comparative bids on contractor and subcontracted work to ensure competitive pricing for a complete project. Requiring three bids is a good place to start.
Three bids is an effective number for evaluating for the most cost-competitive bid without being burdensome for either the contractor, owner, or developer.
2. Selecting the Right Contract
Choosing the right type of contract can be just as critical to managing budgets as competitive bidding procedures. Understanding the different types of contracts can help increase transparency and accountability.
The most common contract types include the following:
- Lump sum
- Time and materials
- Cost plus
- Guaranteed maximum price (GMP)
Each contract type should be evaluated for its suitability with common factors including project size, schedule, and scope complexity.
Lump-sum contract types, if not properly procured, could lead to higher markups, increased change orders or inadequate material quality.
Time-and-materials and cost-plus contract types that aren’t appropriately managed by an owner could encounter low productivity resulting in schedule delays and increased construction spending.
GMP contracts, on the other hand, might suffer from poor cost-of-work definitions that result in a lack of control of budget and cost.
3. Strong Cost-of-Work Definitions
Laying out strong cost-of-work definitions can have many benefits when coupled with a GMP contract. A GMP contract allows owners and contractors to define adequate allowable and unallowable costs of work for a project.
Cost-of-work definitions, along with a right-to-audit clause, should be sufficiently clear to enable the efficient validation of compliant project charges.
Engaging an experienced team of construction auditors can help align best practices with competitive-bidding procedures, contract-type selection, and cost-of-work definitions.