What Do Construction Audits Include?

Construction audits are a vital part of managing risk, ensuring compliance, and maintaining financial transparency in a project-driven industry. They help construction companies identify errors, strengthen internal controls, and meet the requirements of lenders, bonding agents, and regulatory bodies. But what exactly does a construction audit include? Let’s explore the core components.

Job Cost Accounting Review

One of the most critical elements of a construction audit is the review of job cost accounting. Auditors examine how project costs—labor, materials, subcontractors, and equipment—are allocated and tracked. This ensures accurate reporting and helps uncover cost overruns or underbillings.

Revenue Recognition and Contract Billing

Audits evaluate whether revenue is being recognized properly, often using the percentage-of-completion method. This review confirms that income is reported in alignment with project milestones and accounting standards, such as GAAP or tax-basis rules.

Change Order Management

Change orders are inevitable in construction projects. Auditors assess how these are documented, approved, and incorporated into budgets and contracts. Inadequate tracking of change orders can lead to misstatements in financial reports and disputes with clients.

Payroll Compliance

Payroll is a high-risk area, especially for companies working on public projects. Audits check for Davis-Bacon Act compliance (if applicable), accurate wage classifications, proper reporting, and adherence to prevailing wage laws and labor agreements.

Bonding and Surety Requirements

Construction companies often require bonding to win projects. Auditors verify that financial metrics meet the requirements of sureties and bonding agents, providing assurance of the contractor’s financial health and ability to complete jobs.

Internal Controls Assessment

A construction audit also evaluates internal controls related to bidding, procurement, billing, and job costing. Strong internal controls reduce fraud risk and ensure that financial transactions are recorded accurately and approved appropriately.

Conclusion

Construction audits cover much more than just the numbers. From job cost accuracy to compliance with payroll laws and bonding requirements, audits provide a full assessment of a company’s financial and operational integrity. For construction firms, regular audits are not just good practice—they’re essential to sustaining growth, meeting stakeholder expectations, and managing risk effectively.