Construction Contract Compliance Auditing

Construction audits are normally intended to supplement the contract administration function of an organization (or provide a first-line basis of internal control where a contract administration function does not exist within an organization). Audits can be performed at essentially three different stages of the project. They are as follows:

1. Pre-contract Audits: Auditing before the contract is actually signed (executed). This process allows an owner to evaluate a prospective contractor’s proposed rates and related internal cost structure (to support such rates) before actually agreeing to same in a contract. We believe this is one of the more powerful tools available to management and is designed to supplement the negotiation and development of a contract. Some may question whether an owner has the “right” to audit before a contract is signed or if the contractor would even allow for such process to occur. It has been our experience that contractors will allow an owner access to their books and records (prior to signing a contract) for many reasons. Finally, while “rights” apply primarily to signed contracts, an owner certainly has the “right” to request a pre-contract audit.
2. Interim Audits: During the course of construction, many organizations choose to perform “interim” audits on a periodic basis (intervals are a matter of choice) to ensure that contract terms and conditions are adhered to or that controls and administrative procedures are in place and working as designed. Interim audits provides a mechanism to identify problems or deficiencies in the process, so that such areas can be addressed and corrected before the end of the project. Conventional wisdom of the interim audit process is to assess and fix problems earlier rather than later or before they become bigger problems.
3. Post-project Audits: Most often, without regard to pre-contract or interim audit involvement, many owners choose to audit a project at or near its completion to ensure that the entire project is evaluated “in context” and that nothing has “slipped through the cracks.” This big picture perspective allows an owner to evaluate a project from a broader view, which provide for systematic and efficient mechanisms for an effective contract closeout. While the degree or comprehensiveness of any such post-project audit can be debated, we recommend that all projects undergo some sort of overall basic project review to ensure that nothing has slipped through the cracks.