Internal Audit Process of an Ongoing Construction Project

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Audit is defined as an all-encompassing scope of the construction process from solicitation of bids to final payment. It is not just looking for cost recoveries or overbilling, but also providing process improvement recommendations for the project management team

Internal audit program consists of:

• Preparation of control schedules
• Reconcile project expenditures
• Direct labor analysis
• Labor burden analysis
• Change order analysis and pricing analysis
• Subcontract analysis
• Material purchases
• Verification of contracted scope
• Equipment rental analysis
• Bonds and insurance analysis
• Quality assurance and quality control


Let’s take a look at each of the above steps for the Internal Audit Process of an Ongoing Construction Project.

1. Preparation of control schedules.

Under this, an investigation of the following documents should be done.
> Contractor’s applications for payment
> Owner’s project payments
> Pay application backup documentation
> Contractor’s costs by the major construction phase
> RFIs and scope changes

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2. Reconcile project expenditures

Reconcile project expenditures obtain all project-related financial or accounting transactions that document owner expenditures. It reconciles the sum of the total payments made to each vendor to the various contract amounts as adjusted by change orders. Also, it reviews a sample of invoices paid directly by the owner for services, materials, or other costs which may have been the responsibility of the general contractor.

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3. Direct labor analysis

Direct labor analysis obtains payroll registers and certified payroll information. It audits for activity that may not be legitimate reimbursable costs. It compares independent records of activity at the job site to the payroll charges. It determines whether or not personnel charged to the
job may have been working for subcontractors or affiliates without appropriate back charges. Also, it verifies the allocation of payroll costs.

4. Labor burden analysis

Labor burden analysis decomposes the labor burden and determines the basis for the contractor’s charges for payroll taxes, insurance, and fringe Audit for activity which may not be legitimate reimbursable costs.

It reviews other components of the contractor’s labor burden charges for appropriate methodology in application Trace payroll charges to the contractor’s payroll register. Also, it decomposes the union benefits charges and separates them from labor burden charges.

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5. Change order analysis and pricing analysis

Change order analysis prepares a control schedule of owner change orders. It reviews the detailed change order backup documentation. It performs the recalculation of change orders. It verifies the appropriateness of change order material pricing, material quantity take-offs, labor productivity factors, and related extensions. Also, it reviews change orders for errors

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Pricing analysis ensures the change order represents a legitimate change in scope. It determines whether or not any owner-provided items might have been used. Also, it verifies that the contractor does not participate in subcontractor buy-outs of inflated change order price proposals

6. Subcontract analysis

Subcontract analysis prepares a control schedule of all base subcontract and subcontract change orders. It balances paid invoices to the schedule of base subcontract and change orders. Also, it confirms receipt of unconditional lien waivers

7. Material purchases

Material purchases examine contractor’s job cost detail and Review competitive quotes obtained from material suppliers it audits for purchases of excessive amounts of material and Examines test and inspection reports

8. Verification of contracted scope

Verification of contracted scope develops a list of the unusual scope of work items to be independently verified. It reconciles the use of contingency budget with status reports and documentation and Verifies unaccepted alternatives are not substituted.

9. Equipment rental analysis

Equipment rental analysis obtains a breakdown of the contractor’s equipment rental rates charged to the project. It obtains daily reports and timesheets which document the equipment usage and Ensures that the rates charged are consistent with those prevailing in the local area.

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10. Bonds and insurance analysis

Bonds and insurance analysis obtain the copy of the contractor’s performance and payment bonds and corresponding power of attorney from the surety. It reviews the contract to determine the type and amount of general liability and other special insurance coverage required to be carried by the contractor and obtain copies of Insurance Certificates from the contractor.

11. Quality assurance and quality control

Quality assurance and quality control review minutes from various meetings, contractor’s daily logs, engineering field test reports, and any other correspondence files. It obtains and reviews the contract with materials testing and quality control/quality assurance firms and Obtain and reviews contractor and/or subcontractor submittals, shop drawings, and cut sheets.

Did you know the above 11th internal audit process? Did you apply them?

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