Why is an audit important in construction?

A construction audit is important because it ensures project costs are not over billed and are compliant with the terms of the contract.  Below is a general overview of why it is important to have an auditor working as part of your project team.

Construction audits are important because of who is preparing the invoices.  Invoices and change orders are generally prepared by the project manager or another member of their team.  In many cases the person preparing the invoice is not an accountant.  Due to this, mistakes happen.  These mistakes may include duplicating costs, charging labor rates that are too high, or even billing for materials that were not used on your project.  Sometimes a simple math error could result in thousands of dollars being over billed.

Construction audits are important because owners aren’t familiar with construction costs.  Generally, when an owner reviews an invoice, it is hard to know what you are looking at.  A construction auditor is familiar with how allowances and change orders are handled and how markups such as SDI or GLI are calculated.  An owner may not know if a labor rate looks reasonable for a project manager, or a plumber, or a carpenter.  Even more specifically is the carpenter a Foreman or an Apprentice?  How much is normal to pay for equipment?  Is an appropriate amount of retainage being held?   Who are the related parties in the industry?  While an organization may have an internal audit team it is more efficient in terms of time and cost to hire a construction audit expert.  (Self-promotion plug: Especially when hiring CAC since we will never bill more than the overbillings we find.)

Construction audits are important because one error can make a big difference.  An invoice may be over a thousand pages.  Due to the dollar values involved, one error in those thousand pages can be a lot a money.  For example, maybe one week of field labor is duplicated, that one line is an extra $25k.  Maybe one order of materials in your invoice was not for your job, that’s another $40k in one line.  On the other hand, maybe labor rates are overstated by only one or two dollars an hour, but when you start to have thousands of hours billed, that really begins to add up.  The size of many of the transaction on a large project make each line in a thousand-page invoice worth reviewing. 

Construction audits are important because organizations will spend a lot of time and money to ensure there is a good contract in place before starting a major capital project.  This is very important, but if there is not someone involved on the project who understands that contract and is thoroughly reviewing the cost of the project to ensure everything is in compliance with that contract, the time and money spent on developing the contract may be wasted.  On many of the projects I have worked on just stating the terms of the job in the contract is not enough, someone needs to hold the construction managers accountable to complying with those terms.