Hire a Construction Auditor to Reduce Project Risk and Control Budget

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:

  • Budgets
  • Cost compliance
  • Schedules
  • Quality
  • Stakeholder expectations

Specifically, contracting strategies should include the following:

  1. Competitive bidding procedures
  2. Selecting the right contract
  3. 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.

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.

Is It Important to Choose a Construction Auditor with a Technical Construction Background?

If an auditor doesn’t have a technical background in construction, then the following components of the audit could be at risk:

  • Project objectives. The most appropriate objectives to address the various performance aspects of your capital program may not be selected. Your project could experience cost overruns, gaps in funding availability, or schedule delays.
    Identifying the appropriate audit objectives could help with reviewing project processes, procedures for managing scope, prioritization of projects, quality, schedule, budget, or change-control methodologies and reporting.
  • Criteria. The most appropriate criteria for evaluating results, controls, efficiency, and compliance may not be utilized. Setting appropriate criteria is a crucial step and could include purposes or goals prescribed by law, regulations, or the audited entity’s officials, policies and procedures, and technically developed standards or norms.
  • Methodology and scope. The methodology and scope selected may not result in sufficient and appropriate evidence to support meaningful audit conclusions. Scope and methodology should be designed to obtain evidence that addresses the program’s objectives while providing reasonable assurance of satisfactory evidence to support the report’s conclusions.

What Are Common Financial Issues with Construction Projects?

Some common program pitfalls with construction projects can include:

  • Cost overruns resulting from ineffective procurement practices
  • Schedule delays that impact operations
  • Penalties for noncompliance with state or federal regulations
Potential Construction Audit Risks
  • Procurement practices and noncompliant procurement practices—for example, board policies and procedures and state laws
  • Staffing gaps and redundancies
  • Excessive construction charges
  • Schedule, scope, or quality management gaps

How Much Cost Savings Is Potentially Available Through a Construction Audit?

If a mechanical or electrical contractor’s work is completed for less than the maximum allowable subcontract cost, any savings not negotiated as part of an incentive clause could become part of the risk contingency included in their allowed construction costs.

If the general contractor or construction manager doesn’t apply this contingency balance to project usages, the amount could end up available to the owner, resulting in overall project savings.

With program costs ranging from a few million to several billion dollars, stakeholders want to know where and how funds are being spent. High-profile, high-dollar projects—such as new schools and infrastructure upgrades—typically receive extra scrutiny from the owner, media, and public.

What Are the Qualifications for a Construction Auditor?

The value provided by the construction auditor correlates with the level of qualifications they bring to the project. A construction auditor with the following qualifications can provide a more streamlined experience for your project.

Continuing Professional Education

When a construction audit is conducted as a performance audit, performance auditors are required to complete applicable continuing professional education (CPE), measured in required credits, and technical knowledge of specialized subject matter.

GAGAS requires a level of continuing education, stating “Auditors who plan, direct, perform engagement procedures for, or report on an engagement conducted in accordance with GAGAS should develop and maintain their professional competence by completing at least 80 hours of CPE in every two-year period.”

This includes:

  • Twenty-four hours directly related to government auditing, the government environment, or the specific or unique industry in which the audited entity operates
  • An additional 56 hours that enhances the auditor’s professional proficiency to perform audits

Performance and Construction Audit Expertise

In addition to CPE, “The audit organization’s management must assign auditors to conduct the engagement who, before beginning work on the engagement, collectively possess the competence needed to address the engagement objectives and perform their work.”

Construction auditors need to bring to each engagement expertise in construction and performance audit methodologies and analysis techniques as well as their specialized construction knowledge. With this expertise, auditors can better identify risks based on the audit objectives.

Do Any States Require Construction Audits?

A construction audit can be beneficial for projects in every state, but especially Washington where they’re required.

Washington State Legislature, RCW 39.10.300, allows public bodies to utilize design-build procedures, including progressive-design, for public-works projects if:

  • Total project cost is over $2 million
  • Construction activities are highly specialized with a critical design-build approach
  • Design-build approach is critical in developing the construction methodology or meet other specific requirements

As an alternative to the subcontractor selection process outlined in RCW 39.10.380, a general contractor or construction manager could—with the approval of the public body—select the mechanical and electrical subcontractors by following the outlined requirements in RCW 39.10.300.

Expertise in construction and related controls aren’t typically core competencies for educational and other governmental entities and the individual departments within them. As a result, owners should contract for performance audits to help programs and projects stay on track, within budget, and in compliance with contract requirements.

We’re Here to Help

If you have any questions about choosing a construction auditor for your organization, please contact your Moss Adams professional. You can also learn more about the construction audit process or visit our Construction Practice for more insights.

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