What is a construction audit?
A construction audit is a special scope audit, not a complete diagnostic of a project’s management. It can, however, become a significant element by adding a positive point in owners’ presentations to prospective lenders, investors, and capital markets. Construction contracts are most likely to be audited if they are guaranteed maximum price (GMP) due to the nature of the reimbursable costs, although construction audits can and are conducted on other types of contracts.
The motivation behind construction audits
It is not surprising that contractors, more often than not, become suspicious and have many questions when the client notifies them that their project may be subject to an audit. Some of the questions that might arise are:
- Does the client distrust the contractor?
- Is the client looking for something in particular?
- Is this just a way to dispute the final costs?
There is, of course, the perception that there are many unforgiving auditors who will collect and rake through mounds of paperwork searching for any shred of evidence, inaccuracy, or error in order to “catch” the contractor in some failure to deliver as contracted. No wonder many contractors have a skeptical attitude toward audits and auditors.
That said, there is another point of view to consider. Audits are not necessarily an expression of concern with project performance. The client, who is spending millions of dollars, wants to ensure that the project is being built correctly and efficiently and that the money is spent properly. There may be layers of investors, funding sources and stockholders in addition to the bank loan, all with have various fiduciary requirements as part of the fiscal responsibility for their money. With the rise in news reports on the misuse of funds, it is understandable why a client would request an audit as a way to secure assurance that they are indeed being diligent stewards of the money they are spending or lending. With this perspective in mind, contractors are increasingly accepting construction audits to support their position on projects and to prove that they have acted responsibly within the contract limits.
An auditor’s main role is not to find mistakes to make a contractor look bad or to penalize the contractor. That is just a common misperception. Actually, a construction auditor’s primary function is to provide: a systematic, fair and independent examination of data, records, operations and performance to substantiate the final contractually allowable costs.
How are projects audited?
Some contractors perform internal audits, which are more simplified and can help with project control process but may not satisfy the owner’s need for confirmation of proper controls on spending. A neutral audit helps the owner confidently discuss the care and diligence that is put into the managing of the funds.
The main steps of a construction audit are the same as the steps that should be taken to financially close out a project. There are contractors who perform their own audits as part of their project controls process. Given that they are done internally, these audits are much more streamlined. The quality of a firm’s project controls often has a direct correlation to the magnitude of findings, if any.
There are audit rights for the project owner in virtually every GMP contract. When a contractor is both accepting and supportive there are many advantages. The relationship of trust and confidence between the contractor and owner is solidified. The key results include improved internal controls and a positive reputation in the industry.
For more information on the role of construction auditors and audits in general, please contact me, John Boyle or submit an inquiry for additional services that VERTEX offers.
