As a business owner, you should know how an audit process works to ensure it’s done according to the audit provisions. Proper preparation can help get through the auditing process seamlessly without any significant issues.
This article reviews all you need to know about audits and how to prepare for them as a business owner.
What is contractor auditing, and why do you need it?
Construction audits review the different aspects of a construction project to ensure that contractors are performing the required services satisfactorily per the construction contract.
A construction project involves many people performing different tasks, from the general contractor in charge of the whole project to the other independent contractors carrying out specialized services.
A construction audit ensures everything concerning the project goes as planned without exceeding the project budget.
Project owners, government officials, and construction companies can all conduct construction audits on a construction project. It’s a way to evaluate the implementation progress and effectiveness of projects under construction.
Clients and contractors can’t downplay the importance of a construction audit. It is a vital construction practice that helps determine a project’s progress and ensures the completion of a construction project in due time.
Some benefits of having a contractor audit
A proper construction audit evaluates how well resources are being used, helps identify projects’ loopholes, and highlights aspects contractors can focus on to verify they comply with quality standards.
It’s a critical project management practice that every general contractor must implement to keep any subcontractor involved in check and ensure they are doing their tasks correctly (without exceeding the project budget).
Below are reasons why you need a construction audit when handling projects:
It Aids Cost Recovery
Costs incurred on a construction site vary until the project is completed.
These costs may get out of hand without proper control, resulting in disputes. However, with an appropriate construction audit, you can discern who bears which costs based on the contract and keep projects’ expenses within budget until they’re completed.
It Enhances Internal Control
Studies have established that the inability of contractors to stay within the project scope affects the project’s progress.
Thus, most project owners hire managers with in-depth project management knowledge to supervise and ensure every contractor or subcontractor stays within the project scope.
A proper construction audit gives the project owner internal control to ensure the project manager is performing a satisfactory service.
It Ensures Optimal Safety
A contractor audit sometimes involves a critical review of the construction site’s general conditions and procedures involving heavy equipment and hazardous materials, thus ensuring optimal environmental and workers’ safety.
It Evaluates the Project’s Progress
A proper audit ensures timeliness and efficient use of project resources.
Good construction auditors conduct audits by visiting the job site to interact with personnel and contractors on-site, inquire about expenses, review proof of costs, take records, and have an accurate account of the project progress.
It allows the auditor to estimate the duration remaining for the project to be completed, the value and total costs or expenses thus far, and the remaining cost required to finish the project. Most companies bill the project owner based on the completion level.
A proper audit can help the company determine whether the project is at an appropriate value to request an invoice payment.
Tips to Stay compliant with your contractor audits
Many compliance issues may arise during a contract audit process due to many aspects. However, with the right approach, you can resolve these audit issues and create a perfect understanding that can allow the project to run smoothly per expectations.
Unlike popular belief, payments and pay rates aren’t usually responsible for compliance issues during the audit process. The three major causes are contract, change orders, and documentation.
To stay compliant, there’s a need to review these four factors closely. Let’s look into them below.
Carefully Review Your Contract
This is a simple task that can create lots of compliance issues if overlooked. Contractors should understand the contract’s content perfectly and ensure it reflects their correct intent based on the cost agreed.
Contract auditors will only apply contractual language during the audit process without regard to the contractor’s perception or understanding of the contract.
Thus, a contractor must be specific with his expectations and get clearance in the areas that need further explanation.
Ensure Effective Documentation
Construction project-related costs are mostly allowable, but a lack of proper documentation may prompt an auditor to question these costs during auditing. Ensure financial statements are well documented, transparent, orderly, and timely.
Two costs usually occur during an audit: the questioned and unsupported costs.
The former are paid bills that aren’t allowed according to the contractual agreement. The latter are allowable costs that require documentation as proof.
Without providing documented evidence that indicates the contractor does pay these bills, the auditor has no choice but to report the lack of documentation. Unsupported costs usually result in disputes and compliance issues.
Thus, efficient documentation is necessary to avoid this and stay compliant.
Prompt Processing of Change Order
If something didn’t go as planned (i.e., a change in the guaranteed maximum price to pay for a service), swift processing of change orders can increase the likelihood of it being approved.
The contractor shouldn’t wait until the project’s end before submitting the additional cost. Such contractors can negotiate based on estimates before incurring the cost to avoid being unable to recover the costs and possible disputes during audits.
Contractors can strengthen contract terms with any project owner, especially terms involving allowable and unallowable costs.
Dealing with subcontractors and the project owner transparently and ensuring proper documentation is one way a contractor can avoid issues during contractors’ audits.
Contact us today at Contractors Liability to get more information about the auditing process and prepare you for any problems you may face regarding your contractor business.