Contruent Blog

The Role of Audits in Maintaining Cost Control in Construction Projects

July 2024

Cost overruns in large, long-term capital projects are still too common, despite everyone’s best efforts to avoid them. They often precede needless financial challenges—and justifiable concerns from stakeholders who want and need more transparency into where and how money is being spent.

This underscores the importance of effective, ongoing cost control practices as a risk mitigation and strategic planning necessity.

Construction audits have a role to play in this. Although cost control may not be their primary purpose, they can be an effective tool to add to the arsenal. Audits offer a structure to proactively examine costs and the factors that influence them while affording a measure of control over an otherwise involved process. In this context, they function effectively as cost control audits.

Audits As a Cost Control Tool

Going behind the numbers reveals insights. Audits go beyond checking calculations and verifying records. They delve deeper, pulling back the curtain on existing cost management practices. The process identifies known and hidden cost drivers as well as opportunities for savings, prompting further exploration. Here are some questions the audit process can help answer:

  • Have the best terms for materials, labor and services pricing been negotiated?
  • Are there billing discrepancies suggesting that charged costs don’t align with their respective contracts?
  • Where are there opportunities to allocate resources more cost-effectively?
  • Are there extraneous expenses that can be eliminated or reduced such as replacing costly travel for in-person meetings with videoconferencing?
  • Are there frequent or out-of-scope changes that need more rigid controls over approvals
  • Are technology tools being used to their fullest advantage to better track, forecast and manage costs?

Early risk detection prevents or mitigates cost overruns. Questions like the above highlight how the auditing process can flag suspect, incorrect or fraudulent activities.

Errors and inconsistencies in accounting, contracts, or cost management practices are unwelcome surprises in any project. However, lengthy capital projects are inherently dynamic. Cost data and the factors affecting them are constantly evolving, making inconsistencies more likely. Uncovering actual and potential issues through audits presents valuable opportunities to improve or shore up any weaknesses or anomalies that can jeopardize cost control efforts.

Regular audits play a crucial role in risk management. By detecting issues early, they prevent costs from spiraling out of control and exceeding estimates. Earned value management (EVM) facilitates earlier and more precise identification of these issues. It tracks real-time cost and schedule data against project baselines, revealing efficiency gaps and flagging potential risk areas that need attention.

At the minimum, audits mitigate the financial impact of unexpected problems. So, small billing errors won’t escalate into cumbersome collection issues. Underestimated material costs won’t create long-term budget discrepancies that affect project costs. Unauthorized change orders won’t become a direct line to unexpected budget hits.

The sooner issues are discovered through the audit process, the more time there is to determine their causes and take corrective measures to protect against budget setbacks or delays.

Regularity enhances accountability and reliability. By bringing documentation and procedures into the open, routine audits uncover details about project costs, budget expenditures and adherence to cost management processes. Still, this transparency also ensures that management and stakeholders are fully informed and engaged.

Regular audits and management oversight build upon this foundation of transparency by encouraging a culture of individual and team accountability. This awareness builds a sense of ownership. Knowing their work is subject to an audit is a powerful motivator for everyone to take a more active role in cost control; that focused diligence to stay on top of change orders, invoices, accounts payable and contracts boosts the reliability of cost data, thereby bolstering confidence in cost control decisions and actions.

Beyond Process: The Impact of Audits

Audits are essential in optimizing day-to-day cost control decisions, but their impact extends far beyond.

Audits support a practice of ongoing improvement

  • Many fixes are made incrementally to address immediate cost management concerns or weaknesses. Over time, all those gradual changes, tweaks or corrections form a continual refinement of the cost control process.
  • Auditing helps establish benchmarks against which to assess progress in managing spending and set targets for future projects.
  • This refinement can have a knock-on effect of fostering an improvement-focused mindset, where opportunities to proactively reduce costs and enhance processes become part of the culture.

Audits surface the priorities

  • Audits do more than find where improvements can be made; they draw attention to the most pressing issues, from exposing holes in approval protocols that allow unauthorized work or costs to situations that jeopardize the project schedule or budget.
  • Recommendations are typically part of the audit process, advising how to handle or resolve each issue.
  • Management is then able to make the best use of their time and energy by focusing first on higher priorities that involve the most financial risk or potential cost advantage.

Audit trails support more informed decision-making

  • From a cost control perspective, they provide a frame of reference for the when and why behind spending decisions, the financial impact of changes and evidence when protecting against costly disputes.
  • EVM provides objective data that becomes part of the audit trail, making it more robust. When that data is presented via online dashboards, it becomes a visual audit trail. This helps management better understand and track cost and schedule performance and progress, and more easily see and investigate discrepancies.
  • Think of the learnings gleaned from audit trails as a goldmine of insights, not just for preventing past mistakes but also for honing cost control processes and ensuring smarter spending decisions on future construction projects.

Effective cost control in construction projects isn’t just about tightening belts; it’s about harnessing data-driven insights. Regular audits act as a strategic tool, providing those valuable insights to optimize spending decisions today and identify areas for future enhancement.

Improving cost control is on everyone’s radar. In addition to conducting regular audits, having an effective full lifecycle cost management solution is a step toward gaining the control you need. Let us know if you’d like to learn more or request a demo.