A construction or contractor audit tests three things that must agree: what the contract allows, what has been built, and what has been billed and booked. The audit follows each project from tender to final bill, checking costs, running bills and progress so revenue and profit are not overstated or understated. The key point from ICAI guidance is that billing and payments do not by themselves prove how much work is done.
Last reviewed: 17 October 2026. Facts checked. We opened one ICAI Expert Advisory Committee opinion on AS 7 (eacopinion.icai.org, opinion 7/6). It states that revenue under the percentage-of-completion method is set by reference to the stage of completion, and that progress payments and advances may not reflect it. We also ran searches on Ind AS 115 and construction contracts, but did not open the standards or any tax rule, so we give no tax rates or limits. Confirm the standard that applies to your client and current rules.
What it is
Construction accounting is project based. Each contract has its own price, cost, timeline and risks. A contractor audit may be a statutory audit of a construction company, an internal audit of project controls, or a client-side review of a contractor's bills. Our project audit guide covers the client's side.
Step 1: Know the contract
- Contract type: fixed price, item rate, cost plus or lump sum.
- Payment terms, retention, advances and recovery.
- Variations and change orders, and who approves them.
- Penalties and liquidated damages for delay.
- Start date, completion date and any extension of time.
Step 2: Test costs
| Cost | Check |
|---|---|
| Materials | Purchase orders, goods receipt, site issue records, wastage |
| Labour and subcontractors | Attendance, work orders, measurement, certified bills |
| Equipment | Hire records, fuel logs, depreciation allocation |
| Site overheads | Allocation to the right project |
| Cost to complete | Updated estimate with reasons for change |
Make sure costs sit in the right project and the right period. Costs moved between projects to hide a loss are a classic problem.
Step 3: Test billing
Running account bills should agree with measured work.
- Compare the bill quantity to the measurement book and drawings.
- Check rates against the contract or approved variation.
- Confirm the client or engineer's certification and date.
- Check retention and advance recovery were deducted as agreed.
- Match bills to receipts and aged receivables.
- Look at bills raised late in the year, and at credit notes after year end.
Step 4: Test progress and revenue
The ICAI opinion we opened quotes AS 7 on stage of completion. It says revenue is determined by reference to the stage of completion of the contract activity, that all relevant factors must be considered, and that "progress payments and advances received from customers may not necessarily reflect the stage of completion". Two practical consequences:
- Do not accept the billed percentage as the progress percentage without evidence.
- Compare billed, certified and physical progress, and explain gaps. Search results suggest common measures include cost incurred against total estimated cost, and surveys of work performed.
Companies on Ind AS follow Ind AS 115, and others follow AS 7. We did not open Ind AS 115. For revenue method questions, see our Ind AS 115 audit guide.
Test the estimate of total cost. If it has not changed in months while costs have, ask why.
Step 5: Look for losses and claims
- Is a loss-making contract provided for?
- Are claims against the client recognised only with strong evidence?
- Are liquidated damages for delay assessed?
- Are retention balances recoverable and aged?
- Are guarantees and warranties listed?
Contractor audit versus project audit
| Question | Contractor audit | Project audit |
|---|---|---|
| Point of view | The contractor's books and controls | The owner's spend on the project |
| Main risk | Revenue and profit timing, cost overruns | Overbilling, scope creep, quality |
| Key records | Contracts, bills, cost sheets | Budgets, change orders, certificates |
Site visit checklist
- Walk the site with the project manager and compare physical progress to the progress report.
- Photograph key stages and keep them with the working paper.
- Check material stores and compare to records.
- Talk to the site engineer and the accounts team separately.
- Confirm subcontractor work against certified bills.
Red flags
- Billing far ahead of physical progress.
- Cost to complete unchanged for months.
- Heavy costs booked in the last month.
- Variation work performed without approval.
- Large unbilled work in progress that is not supported by certification.
- Receivables older than the contract allows.
Suggested working papers
The real estate project audit workbook offers a base layout for project-level tests. The fixed assets audit workbook helps with equipment. Adapt either to the contract.
Frequently Asked Questions
What is a construction audit?
It is an audit of a construction business or project that tests contracts, costs, billing and progress so that revenue and profit are right.
How is revenue recognised for a construction contract?
By reference to the stage of completion, as AS 7 puts it, or under Ind AS 115 for companies that apply it. We opened only the ICAI opinion on AS 7.
Do running bills show how much work is done?
Not on their own. ICAI's opinion on AS 7 warns that progress payments and advances may not reflect the stage of completion.
What is cost to complete?
It is the estimate of costs still needed to finish a contract. It drives the stage of completion on a cost basis, so it needs review.
What should an auditor visit on site?
Compare physical progress to reports and bills, check stores, and speak to the site team and the accounts team.
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