Let’s face it: no one likes to hear the word “audit” in any context. Unfortunately, construction audits are a reality for many construction projects. Audits are most likely seen in projects that involve contracts with a cost-plus-fee, cost-plus-fee with a guaranteed maximum price or time and materials framework.
Because the cost to the owner is directly related to the cost of materials, the owner is more than likely going to want to see documentation of those costs to ensure they are getting a fair price. The owner may want to see financial records in a lump sum contract when there are change orders or a claim for liquidated damages; typically, however, you are not likely to face an audit for a lump sum contract. How do you prepare for something like this?
1. Keep your records accurate. Depending on the contract, you may be expecting regular audits, or an audit may come as a surprise. Because of that, it’s important to keep your records up-to-date and accurate 100% of the time.
2. Know and understand the contract. You may want to meet with an attorney to ensure you fully understand the contract. The contract itself may give the owner a right to audit the project even after it’s completed. If you are unsure, an attorney can help you negotiate audit clauses to ensure you are protected and you know how to prepare for potential audits. You will need to know things like what type of documentation you are required to keep, how long you have to retain those records and who has a right to see those records.
3. Stay organized. Ensure you are retaining all subcontractor invoices with lien waivers, tracking the daily activity of subcontractors and any other documents that might be relevant to the project. You may need to adjust company policies and procedures to ensure that documents are retained and organized in a way that you can access them in response to an audit.
4. Practice. It’s a good idea to do a practice run to ensure your company is prepared for an audit. This might include: tracking progress and ensuring that it matches the billings thus far, identifying signs of cost changes or shifts that may affect the profitability of the project and checking compliance with all contract provisions. Doing this before an audit will help you identify any problems and address them before the real thing.
If you are negotiating an audit clause in a contract or facing a request for an audit, contact us to ensure your rights are protected.