Construction company audits are notoriously complex. Between percentage-of-completion accounting, change orders, and work-in-progress schedules, even experienced financial teams can find themselves facing construction audit findings that threaten bonding capacity, delay project financing, or trigger costly adjustments. The good news? Most construction audit issues are preventable with the right systems and internal controls in place.
Here are five of the most common construction audit challenges we see and practical steps construction companies can take to avoid them.
Inaccurate Work-in-Progress (WIP) Schedules
Your WIP schedule is the backbone of construction financial reporting, reconciling contract revenues, costs, billings, and gross profit across all active projects. Yet many construction companies struggle with incomplete reports, unsupported cost-to-complete estimates, or WIP schedules that don’t reconcile to the general ledger. These construction accounting errors affect revenue recognition, income statements, and balance sheet accounts like overbillings and underbillings.
How to avoid WIP schedule audit issues:
- Reconcile your WIP to the general ledger monthly and make this a non-negotiable close procedure
- Ensure revenue and costs tie back to your trial balance
- Support percent-complete calculations with documented assumptions
- Review cost-to-complete estimates with project managers each month
Improper Revenue Recognition on Change Orders
Change orders represent both opportunity and risk in construction audits. Recognizing revenue from unapproved or disputed change orders is one of the fastest ways to trigger construction audit findings. Many contractors begin out-of-scope work before change orders are approved, or agree on scope while leaving pricing discussions for later, creating significant profit fade as jobs progress.
How to avoid change order audit problems:
- Implement a formal change order process in every project contract
- Document all scope changes with written approvals before starting work
- Update contract values and cost estimates in real time
- Never recognize revenue from a change order until it’s approved and the amount is reasonably certain
Misallocated Overhead Costs in Job Costing
Overhead allocation directly impacts job profitability reporting in construction accounting. Many construction companies allocate overhead based solely on direct labor hours or costs. While this works for labor-intensive projects, it can distort profitability on equipment- or material-intensive jobs, leading to significant misstatements in your financial reports and construction audit complications.
How to avoid overhead allocation audit issues:
- Evaluate whether your overhead allocation method matches how your jobs actually consume resources
- For equipment-heavy projects, consider allocating overhead based on equipment costs
- Use a blended approach with multiple cost drivers if your project mix varies significantly
- Review and adjust your allocation methodology annually
Retainage Accounting Errors
Retainage, typically 5 to 10 percent of contract value withheld until project completion, can represent substantial amounts in construction accounting. Common construction audit issues include misstating retainage receivables, failing to match retainage to specific contracts, or incorrectly timing revenue recognition related to retained funds.
How to avoid retainage audit problems:
- Maintain detailed records that trace retainage through contracts, invoices, and collections
- Track retainage by project in your construction accounting system
- Ensure retainage is properly reflected in both revenue recognition calculations and accounts receivable aging
- Review retainage balances quarterly and follow up on amounts outstanding beyond normal collection periods
Inadequate Job Cost Cutoff Procedures
Year-end cutoff errors occur when costs or revenues are recorded in the wrong period during construction audits. Common mistakes include recognizing next year’s revenue in the current year, failing to accrue costs incurred but not yet billed, or prematurely closing out jobs before actual completion. These timing errors can significantly misstate financial results and create construction audit findings.
How to avoid job cost cutoff audit issues:
- Establish clear cutoff procedures and communicate them to both accounting staff and project managers
- Set procedures for accruals and estimates well in advance
- Document your cutoff decisions and the supporting rationale
- Schedule time for proper accrual entries rather than rushing through year-end close
Implementing Construction Audit Best Practices
Construction accounting requires specialized knowledge and robust internal controls. Construction companies that invest in construction-specific accounting software, assign dedicated job cost accountants, and conduct regular internal project reviews significantly reduce their audit risk while improving overall financial visibility and decision-making.
The most successful construction companies treat audit preparation as an ongoing process rather than a year-end scramble. When you have strong systems and internal controls in place throughout the year, construction audits become routine verification exercises instead of stressful investigations. You’ll get cleaner financials, better data for decision-making, and stronger relationships with lenders and bonding companies.
Need help strengthening your construction accounting systems or preparing for an upcoming construction audit? The construction accounting specialists at Boyum & Barenscheer understand the unique challenges construction companies face. Contact our office today to speak with an advisor who can help you implement the controls and processes that will make your next construction audit smooth and efficient.