Construction Audit Program

Table of Contents

• To develop a robust construction audit program, it’s essential to dissect the entire project into manageable components or processes. While some processes might be familiar and routinely audited, a construction audit program needs to be developed that ensures compliance with policies and procedures specific to the project. (In certain organizations, the process of approving construction invoices may involve different signing authorities compared to regular transactions.)

To develop a robust construction audit program, it’s essential to dissect the entire project into manageable components or processes. While some processes might be familiar and routinely audited, a construction audit program needs to be developed that ensures compliance with policies and procedures specific to the project. (In certain organizations, the process of approving construction invoices may involve different signing authorities compared to regular transactions.)

The initial step in building a robust Construction Audit Program involves looking at the project from project’s inception—the executive decision. Obtain the investment decision and/or consult the executive sponsor to understand the executive committee’s approval and project expectations, assuming such documentation exists. Additionally, review the procedures surrounding the investment decision to validate their coherence and ensure sound working assumptions.

Notably, factors like inflation, interest rates, labor, and material availability and costs, especially within international and complex supply chains, necessitate careful scrutiny. External factors such as accidents or geopolitical events can disrupt operations, as evidenced by the recent closure of the Port of Baltimore and shipping issues in the Red Sea. It’s imperative that requests provide sufficient detail for auditors to ascertain the rationale behind the numbers, although this is not always the case.

Key considerations during this phase include:

• Assessing the reasonableness of cost estimates, including the consideration of labor types.
• Verifying the reliability of cost sources, such as real estate marketing sheets and recognized equipment rental guides.
• Ensuring alignment between cost estimates and funding requests.
• Identifying any conditions imposed by the executive committee or funding sources, particularly in federally funded projects (federally funded projects have at lot of criteria around them as required by FAR [Federal Acquisition Requirements] policies).
• Establishing the criteria for project success and evaluating rejected projects.

Once these fundamentals are established, the audit plan can be designed, starting with a thorough understanding of the contract and project team dynamics. This involves:

• Reviewing the vendor vetting process for compliance. This should include ensuring tha the approriate licenses are maintained.
• Identifying contract types, scopes, payment terms, and exclusions.
• Ensuuring that the contract is robust and in the best interest of the organization (many favor contractors).
• Understand what risks are exposed based on the contract written.
• If bonuses were paid, were the requriements for the bonus met.

Understanding the project’s current status entails:

• Assessing the completion percentage and expenditures.
• Identifying and addressing emerging concerns, potentially gleaned from construction meeting minutes.
• Ensuring adherence to policy and contract terms in issue resolution.
• Evaluating organizational representation in construction meetings.
• Applying earned value calculations to assess the project status.
• Compliance and accuracy of monthly project reports.

Subsequent payment auditing involves:

• Verifying the accuracy and compliance of invoice submissions.
• Assessing timeliness in invoice submission and payment.
• Validating supporting documentation, including lien waivers and labor rates.

Change order auditing, conducted by those familiar with construction cycles, includes:

• Investigating the reasons behind change orders and ensuring appropriate documentation.
• Tracking refunds or credits resulting from change orders.
• Validating consistency with contract terms and fees for change orders.
• Assurance that site conditions resulting in change orders actually existed.

Upon completion, auditors must ensure:

• Documentation and clearance of punch list items.
• Resolution of any post-move-in or occupancy concerns.
• Completion of inspections without noted variances.

While this provides a broad overview, additional areas such as insurance, risk management, safety, vendor management, and diversity goals merit scrutiny based on project specifics. Additionally assess whether the project management procedures are appropriate for the projects being done.  This includes analyzing reporting processes and looking at same for operational efficiency and results of the reporting process.

These techniques are discussed in Construction Audit Building a Solid Foundation.

Crafting an effective audit program is a complex task. For assistance in developing your plan, feel free to reach out to Auspicium.