Construction Auditing

Some Internal Audit Concerns

What type of construction contracts exist?

For negotiated contracts, how well is the contractor doing in managing job costs?

For hard bid contracts, what are the controls over change orders? For hard bid, negotiated contracts, and construction management contracts, what constitutes a change? What type of controls and level of review are in place to monitor the processing and issuance of change orders by contractors from subcontractors, and by developer/owner from contractors?

Job estimating procedures? What is the process by which the organization reviews a contractor's or subcontractor's estimate, and how is it monitored over the life of a job?

Bidding process? How familiar is the owner/developer with the contractor's bidding process? What should the involvement be in the bid process and in the pre-construction process.

Financial viability of contractor? What sort of a review process is in place for ascertaining the financial stability and performance ability of the contractor/subcontractor? What are the red flags in a contractor's or subcontractor's set of financial statements which should be inquired about?

Past performance of contractor? What is the process by which a contractor or subcontractor should be reviewed for quality of work, safety issues, ability to man the job, cooperation with the owner, team spirit and other performance criteria?

Compliance with contract? How should an owner/developer monitor a contractor's compliance with contract provisions?

Recording information in the financial records? How is the owner/developer recording development costs, financing costs, architectural and engineering costs, contractor job costs, capitalized interest, etc. in their records? What can be deducted immediately for tax purposes, and what must be depreciated?

End of job warranties? What information should be received at the end of the job with respect to warranties?

End of job manuals? What information should be received at the end of the job with respect to operating manuals?

Contractors cost management process? What can an owner/developer do during a job to monitor and manage job costs?

Regular meetings held with contractor? What meetings should the contractor hold and which ones should an owner/developer attend?

Process and frequency of reviewing cost reports and change orders? What job cost reports should an owner/developer be asking for, looking at, and what should be questioned?

Approving and signing contracts and change orders? What is the process for reviewing and signing contracts and change orders?

Insurance with subcontractors? What should a contractor require of subcontractors and suppliers in terms of insurance coverage to protect both him/herself and the owner? Are the insurers strong or weak companies - - how do you know; how can you know?

Subcontractor bonding? What is the process by which a subcontractor should be qualified, a decision reached whether to bond or not, and what type(s) of performance and payment bonds should be required? Is the surety evaluated, and what constitutes a financially sound surety? If a bond requirement is waived, what can one do to ensure that the payment or performance of a subcontractor (or contractor) is monitored so that "surprises" do not happen?

Qualifications of subcontractor? What is the pre-qualification process for a contractor, subcontractor and/or a supplier? What should their payment and performance ability be based on (e.g., working capital, equity, etc.)? On what multiples of these components should it be based, and against what yardsticks should the financial information of the contractor, subcontractor and/or supplier be measured (e.g., industry data)?

For a list of some key questions to ask your construction contractor, click here. Let us know if you need some assistance in performing construction audits.