If you've been through a construction audit — or are heading into one — you already know they tend to surface the same issues year after year. Some of these are industry-specific quirks, others are just areas where things slip through the cracks. Either way, knowing what auditors are looking for gives you a real advantage. Here are five of the most common findings we see in construction audits, and what you can do about them.
1. WIP Schedule — Underbillings, Overbillings, and Stale Estimates
The WIP schedule is where auditors spend the most time, and for good reason — it drives both revenue recognition and the balance sheet. The two biggest risk areas are billings that are out of sync with actual progress, and cost-to-complete estimates that haven't been seriously revisited.
Underbillings (costs in excess of billings) aren't inherently bad, but a pattern of growing underbillings across multiple jobs is a red flag. It can signal that projects are getting ahead of themselves on cost without corresponding progress or that billing practices are lagging. Overbillings carry the opposite risk — they inflate the balance sheet with a liability that represents work not yet performed, and if a job goes sideways before that work is done, the financial exposure can be significant.
Stale estimates are equally problematic. When project managers haven't meaningfully updated their cost-to-complete figures, the percentage of completion calculation is built on a bad foundation. Auditors will push on this — particularly on jobs that are running over budget or behind schedule — because an optimistic estimate can mask what is effectively a loss contract.
What to do: The WIP schedule needs to be a monthly management tool, not a year-end reconciliation exercise. Estimates should be updated by someone who actually knows the job status, and overbilling and underbilling balances should be reviewed and understood at the project level — not just in the aggregate.
2. Bonding and Surety — What Your Financials Are Really Saying
This one doesn't always show up as a formal audit finding, but it's closely tied to the audit process and worth understanding. Sureties don't just look at your bottom line — they're analyzing your financials the same way an auditor does, and the same issues that cause audit problems tend to cause bonding problems too.
The areas sureties focus on most: working capital, the quality of your underbillings, the trend in your backlog, and whether your financial statements are prepared by a CPA firm with construction experience. A large underbilling balance with no support behind it, or a WIP schedule that doesn't reconcile to the general ledger, will get noticed. Sureties are also looking at how your financials are presented — reviewed versus audited statements can meaningfully affect your bonding capacity, and some sureties require audited financials above certain contract thresholds.
What to do: Think about your surety relationship year-round, not just when you need a bond. If your bonding capacity has been a limiting factor on the size of projects you can pursue, the answer is often found in the quality and presentation of your financials — not just your profitability.
3. Related Party Transactions — Disclosure and the ASC 842 Trap
Construction companies frequently have overlapping ownership structures — equipment leasing entities, real estate holding companies, sister companies sharing labor or resources. These arrangements are common and usually completely legitimate, but they need to be properly identified and disclosed. When auditors find related party activity that wasn't surfaced upfront, it creates questions that wouldn't have existed otherwise — even if the underlying transactions are entirely benign.
The disclosure issue is only part of the problem. The bigger risk is that related party transactions often aren't structured or priced the way arm's-length deals would be. Space or equipment leased from a related entity at below-market rates, management fees paid to an owner-controlled holding company without a formal agreement, intercompany loans with no documentation — these are all areas where auditors are required to dig in. The question isn't just whether it was disclosed, but whether the terms are reasonable and whether the financial statements reflect the economic reality of the arrangement.
For companies with related party leases specifically, it's also worth understanding whether those arrangements trigger any accounting consequences beyond disclosure — ASC 842 has created some complexity here that catches people off guard.
What to do: At the start of every engagement, take a complete inventory of related party relationships — not just the obvious ones. Think about every entity where there's common ownership, every transaction where money or resources move between related parties, and every informal arrangement that's been operating on a handshake. If it involves a related party, it needs to be documented and disclosed, and the terms need to be something you can defend.
4. Job Cost Cutoff — Testing It the Right Way
Cutoff errors in construction are common and can be material. The core problem: subcontractor invoices and supplier bills often don't arrive until weeks after the work was performed, so costs routinely land in the wrong period. When costs are recorded late, your percentage of completion is overstated at period-end, revenue is pulled forward, and the WIP schedule doesn't reflect reality.
The good news is that cutoff is testable in a very specific way. The most effective procedure — one that auditors use and that clients can run themselves — is a completeness test using the subsequent period general ledger. Pull all job cost entries from the first 20 to 30 days after year-end and look for invoices dated during or related to the audit period. Those costs should have been accrued. Any that weren't represent a cutoff error. The larger the dollar amount relative to the job's estimated total cost, the more it matters — because even a moderate misallocation can move the needle on percentage of completion.
For subcontractors specifically, the test can be extended by comparing subcontractor invoices received after year-end against signed subcontracts and lien waivers — if a sub submitted a lien waiver for work through December 31st but you didn't accrue for it, that's a gap.
What to do: Build a cutoff accrual process into your year-end close. Reach out to major subcontractors before the books close to get their billings for work completed through period-end. And run the subsequent period general ledger test yourself before your auditors do — it's not complicated and it will surface issues while you still have time to address them cleanly.
5. Going Concern Indicators in Construction
Construction is one of the industries where going concern issues surface most often, and auditors are trained to look for them. Thin margins, project overruns, bonding difficulties, and reliance on a single large contract or customer are all conditions that can trigger a going concern evaluation — even at companies that appear busy and growing on the surface.
The indicators auditors focus on in construction specifically include:
- Negative cash flows from operations
- Negative equity
- Maxed out lines of credit
- Negative working capital
- Limited backlog on hand
- Recurring losses at the job level
- Difficulty renewing or increasing bonding or line of credit capacity
- Significant underbillings that may not be recoverable
A company can be generating revenue and still be in a deteriorating financial position — and the WIP schedule is usually where you see it first. If going concern conditions exist, the audit report and financial statement disclosures are affected, which has downstream consequences for bonding, banking relationships, and anyone else relying on those financials.
What to do: Don't wait for your auditor to raise going concern. If your working capital has been under pressure, if you've had a string of problem jobs, or if your banking or bonding situation has gotten more complicated, address it proactively. Having a clear picture of your financial position — and a credible plan to support it — is far better than being on the back foot when the question comes up in the audit.
The Bottom Line
None of these issues are unsolvable. Most come down to having good processes in place throughout the year — not just at audit time. The contractors who consistently have clean audits tend to be the ones treating their financials as a management tool, not a year-end obligation.
If any of these areas sound familiar, it's worth having a conversation before your next audit rather than after. We work with construction companies at all stages and are happy to take a look at where things stand.
