Construction Contract Review Checklist

Contractor's Office at Job Site

• A contractor's office is established at the job site due to the magnitude and duration of construction projects.
• Certain costs are incurred at the job site, including payroll, labor distribution records, purchasing, payment of invoices, cash receipts and disbursements records, petty cash funds, contract costs records, and field equipment records.

Weaknesses in Accounting and Internal Control System

• The temporary nature of job site offices may pose weaknesses or nonexistence in the accounting and internal control system.
• The auditor should conduct a surprise visit to examine the accounting records and review the internal control system in the site.

Problems in Construction Industry

• Payroll padding and loss or pilferage of construction equipment are problems in the construction industry.
• The auditor should consider the payment to workers at the site and making physical inventory tests of field equipment.

Internal Audit Department

• Some large contractors have a separate internal audit department responsible for auditing accounting records and procedures in job sites.
• The auditor should be satisfied with the work of the internal auditor and review the reports during the period.

Review of Contracts

• The auditor should review all major contracts, including contract price, escalation clauses, terms of payment, cancellation features, estimated costs by principal contract components, and original estimated profit.
• Unusual contract features, bonding and insurance requirements, and equipment rental provisions should also be reviewed.
• The auditor should obtain schedules or computations of construction in progress, including the cost incurred in the current year and estimated gross profit this year.

Contracts with Abnormally Low Rate of Gross Profit

• Contracts with abnormally low rate of gross profit should be reviewed with the contractor's engineer and management to determine the losses to be recorded.

Raw Materials and Supplies

• The auditor should audit the materials and supplies used in the construction, which influences the percentage of completion to be used in computing for the gross profit.
• Problems may arise in obsolescence and inactivity, excess materials on contracts, and usage of raw materials.

Accounts Receivable

• A contractor's receivables include amounts currently receivable on completed and uncompleted contracts and certain percentages retained from these receivables.
• Retention receivables are withheld until the completion of the job or even longer in the event certain contract guarantees must be fulfilled prior to final acceptance.
• The contractor's accounting records should have separate accounts for these two types of receivables.
• Receivables should be aged as of the end of the reporting period, and delinquent accounts should be carefully reviewed and discussed with the management to ascertain any doubtful accounts expense to be recognized.