5 Critical Audit Risks Construction Companies Can't Afford to Overlook

Article | August 20, 2025

Authored by Your Firm LLC

Construction audits present unique challenges that can catch even seasoned business owners off guard. Unlike other industries, construction companies face complex revenue recognition requirements, intricate project accounting, and constantly evolving contract terms that create specific vulnerabilities during the audit process.

At MBN & Company, our dedicated Construction & Real Estate team has identified the most critical audit risks that construction companies face—and more importantly, how to address them before they become costly problems.

1. Work-in-Progress (WIP) Schedule Inconsistencies

The work-in-progress schedule is the heart of construction accounting, but it's also where many companies stumble during audits. Your WIP schedule must perfectly reconcile with your trial balance, accurately reflecting contract values, total estimated costs, actual costs, and billings to determine revenue, cost of revenue, overbillings, and underbillings.

"We see companies struggle most with WIP schedules because they're not maintaining them consistently throughout the year," explains Jennifer French, CPA, who leads MBN & Company's Construction & Real Estate practice. "The best-prepared companies review their WIP reports monthly and ensure every change order and cost revision is immediately reflected in their contract schedules."

Common mistakes include overlooking detailed records for change orders, misallocating overhead costs, and omitting estimate revisions from contract schedules. These inconsistencies can trigger extensive audit testing and raise questions about your revenue recognition practices.

2. Revenue Recognition Complexities Under ASC 606

Construction companies using the percentage-of-completion method must ensure revenue aligns perfectly with project progress. The cost-to-cost method requires accurate tracking of all direct costs—labor, materials, equipment, and subcontractors—plus proper allocation of indirect costs like insurance, labor burden, and fuel.

Many companies underestimate the documentation required to support their revenue recognition. Auditors will examine whether billing, costs, and percent complete are aligned, and any discrepancies can lead to significant adjustments.

3. Change Order Documentation and Authorization

Change orders are inevitable in construction, but poorly managed change order processes create substantial audit risks. The most problematic situations arise when work begins before proper authorization or when documentation is incomplete.

Best practice requires establishing clear thresholds for when project changes require formal bidding, setting standard caps on allowed profit above cost, and ensuring all significant changes are authorized by the owner and properly documented before work begins.

4. Contract Schedule and Job Costing Accuracy

Auditors scrutinize whether your job costing systems accurately capture and allocate costs to specific projects. This includes not just direct costs but also the proper allocation of indirect costs across all active contracts.

"Construction companies that struggle with audits often lack consistent cost coding practices," notes Bo Garner, CPA, a partner at MBN & Company. "Training your staff to properly utilize cost codes and maintain detailed job cost records throughout each project is essential for accurate financial reporting."

Your contract schedule should list every contract worked on during the year and reconcile directly with your trial balance. Any discrepancies between your project records and general ledger will require extensive testing and explanations.

5. Year-End Cutoff and Payables Management

Construction companies face unique challenges with year-end cutoff procedures due to the nature of project-based work. One critical mistake is closing the year-end payables cycle too early, which can result in unrecorded liabilities and inaccurate project costs.

Maintaining longer payables cycles and ensuring all subcontractor invoices and material costs are properly recorded in the correct period helps avoid audit adjustments and provides more accurate financial reporting.

Preparing for Success

The key to navigating these construction-specific audit risks lies in year-round preparation rather than last-minute scrambling. Companies that maintain organized contract files, consistent WIP schedules, and robust job costing systems consistently experience smoother audits with fewer surprises.

At MBN & Company, our Construction & Real Estate team understands these unique challenges because we specialize exclusively in serving construction companies. We speak your language and know the intricacies of construction accounting standards, helping you build audit-ready financial systems that support both compliance and growth.

Partner with Construction Industry Experts

The key to navigating these construction-specific audit risks lies in year-round preparation rather than last-minute scrambling. Companies that maintain organized contract files, consistent WIP schedules, and robust job costing systems consistently experience smoother audits with fewer surprises.

At MBN & Company, our dedicated Construction & Real Estate team understands these unique challenges because we specialize exclusively in serving construction companies. We speak your language and know the intricacies of construction accounting standards, helping you build audit-ready financial systems that support both compliance and growth.

Our Construction-Specific Services Include:

• Audit & Assurance Services: External financial statement audits tailored to construction industry requirements, including work-in-progress schedule reviews and percentage-of-completion revenue recognition validation
• Job Costing System Design & Implementation: Helping you establish consistent cost coding practices and proper allocation of direct and indirect costs across all projects
• GAAP Transition Support: Guiding your transition from cash basis to accrual accounting, including ASC 606 revenue recognition and ASC 842 lease accounting implementation
• WIP Schedule Preparation & Review: Monthly and quarterly work-in-progress schedule maintenance to ensure accurate revenue recognition and trial balance reconciliation
• Contract & Change Order Documentation: Establishing proper authorization processes and documentation systems for change orders and contract modifications
• Outsourced CFO Services: Providing ongoing financial oversight and strategic guidance to strengthen your financial controls and reporting systems
• Tax Planning & Compliance: Construction-specific tax strategies including cost segregation studies, look-back method elections, and equipment depreciation optimization

Ready to strengthen your audit preparedness? Contact MBN & Company's Construction & Real Estate team today for a consultation on how we can help your company build robust financial systems and navigate the complexities of construction audits with confidence. Our industry-focused approach ensures you're not just audit-ready—you're positioned for sustained growth and success.