What is a Construction Audit and How Can it Help Your Project?

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A construction audit is a review of various aspects of a project to ensure they are performing appropriately and in keeping with the contract.

Every major construction project is bound to be expensive, there’s no escaping that. The cost of materials, the workforce which needs to be employed and a number of other overheads.

It can be pretty complicated to keep track of all the expenses. Hiring companies can help a lot, but that is not the end of it.

The majority of major construction projects are the so-called G-Max projects, meaning that the contractors will be paid the actual construction cost, up to a guaranteed maximum (hence the name).

Seeing how these projects typically take a lot of time, involve several different companies and cost a lot of money, there is a lot of room for errors and deliberate miscalculations.

Fortunately, there’s a simple solution – construction audits.

What is a Construction Audit?

In short, it is a process which prevents waste of money and other resources.

If a contract contains this provision, the contractor needs to keep a detailed and precise log of costs which have been charged.

The owner of the construction has the right to audit the records at any time and determine whether everything is in order.

Fixed Price Contract Addendum

If the contract is a Fixed Price one, there are some items and costs which the contractor needs to label as ‘allowance’.

These costs need to be kept separate from the overall costs, but they are still subject to an audit and need to be kept a detailed record of as well.

Do You Have to Perform an Audit?

Even if your contract allows you to perform an audit, you are not obligated to do it.

This is just a method of controlling the funds and their use on your project.

If you trust your contractor or you don’t have the time to deal with these details, you have the right not to exercise your right to an audit.

Should You Perform an Audit?

In most cases, there are some funds which get lost in the paperwork, and an audit is a great way to extract these funds and not let them go to waste.

Whether by mistake or by design, most building projects get mischarged, some quite drastically.

And the higher the cost of the project, the larger the sums of money which seem to fall through the cracks.

Some Tips for Performing Construction Audits

First of all, make sure that you do not wait until the construction is completed to ask for an audit. An audit performed at the beginning or in the middle of the construction can ensure that the contractor and other parties involved know that a close eye is being kept on the project and will be more careful with finances in the future.

Larger projects almost invariantly have a lot of loose ends. In most cases, the cost of the audit will be significantly lower than the amount of money saved or recovered after the audit is done. However, there are exceedingly rare situations when the owner has been charged less than the actual value.

The most common issues that auditors find are overcharging for both the materials and labor by the contractor. Similarly, if the contractor is renting the equipment, some of those charges are grossly overblown. Apart from that, it is not uncommon to see costs which are not related to the construction included in the final bill. Things like car registration, team building events, marketing costs, or company parties have been regularly found by skilled and experienced auditors upon closer examination of the documentation.

Ultimately, whether you choose to perform an audit or not is your own decision. However, leaving money on the table is not a sustainable and prudent business move for small businesses.

About the author

Brian Meiggs
Brian Meiggs is a personal finance expert, and the founder of My Millennial Guide, a personal finance site helping you put more money in your pocket. He helps millennials follow the smart money in order to increase their earning potential and start building wealth for the the future. He regularly writes about side hustles, investing, and general personal finance topics aimed to help anyone earn more, pay off debt, and reach financial freedom. He has been quoted as a top personal finance blogger in major publications including Yahoo! Finance, NASDAQ, Discover, MSN Money and more.

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