A capital project audit checks whether a large project, such as a factory, building or system rollout, was approved properly, bought fairly, built to scope, paid correctly and recorded accurately. Most of the money is at risk in three places: the award of the contract, change orders that raise the price, and billing by the contractor.
Last reviewed: 17 October 2026. Facts checked. We searched for how public-sector and consultancy capital project audits are scoped and tested. The results included published audit reports (Toronto, Philadelphia, Port of Seattle, Valley Water) and consultancy guides. These are examples of practice, not standards, and we did not read the full reports. We give no percentages or typical overrun figures because we could not verify any general figure. Accounting treatment is not covered in depth: check the applicable standard for your entity.
Choose the type of review
| Type | Question it answers | When it fits |
|---|---|---|
| Governance and planning review | Was the project justified and approved properly? | Before or at the start |
| Contract and bidding review | Was the contractor chosen fairly? | After award |
| In-flight review | Is cost, time and quality on track, and are payments right? | During construction |
| Closeout and final cost review | Do final costs agree with the contract and what was built? | At completion |
Some auditors split one large project into two audits: the first covering bidding and design, the second covering construction and closeout. This is worth doing for a long project.
Stage 1: Approval and budget
- Is there a business case, an approved budget and a named project owner?
- Who approved it, and was that within their delegated authority?
- Is the budget broken into lines that can be tracked? Is a contingency stated and who controls it?
- Are cost estimates independent of the contractor who later won the work? Audit reports we saw recommended independent cost estimates.
Stage 2: Bidding and contract
- Was the work tendered under the policy? See our procurement and tendering audit guide for the tests.
- Does the contract set rates for labour, equipment and markup at the start? This makes later change orders easier to price and audit.
- Are payment terms, retention, penalties and the process for changes written down?
- Are performance guarantees or bank guarantees in place and still valid?
Stage 3: Change orders
Change orders are where a low bid becomes a high price. Test them closely.
- Get the change order log and tie each approved amount to the signed document.
- Check each has a reason, a cost breakdown and a schedule effect.
- Check it was approved by the right person before the work was done, not after.
- Compare final cost with the original bid and analyse which contractors or packages show the largest changes.
- Recalculate markups on extra work against contract rates.
- Ask whether the change was foreseeable from the original design.
Published audits show these steps finding overbilling on extra work. We do not suggest a typical amount, because results varied by project.
Stage 4: Contractor billing and payment
| Test | How |
|---|---|
| Quantities billed against work done | Site visit or engineer's certificate matched to the invoice |
| Rates against contract | Recalculate a sample of lines |
| Subcontractor and material backup | Ask for invoices and timesheets behind labour or cost-plus billing |
| Duplicate or advance payments | Data test across payment applications |
| Retention and recoveries | Check that retention was held and penalties applied |
| Tax and statutory deductions | Check TDS and GST treatment against the contract and invoice |
The contractor is primarily responsible for billing accuracy, but the owner needs controls that catch mistakes before payment.
Stage 5: Progress, time and quality
- Compare the actual schedule with the baseline. Ask why delays happened and who bears the cost.
- Review the project reports given to the steering group. Are they complete and consistent with the ledger?
- Test quality records, such as inspection reports and rework, for the larger work packages.
Stage 6: Closeout and capitalisation
- Reconcile total project cost in the ledger to the sum of contractor payments and internal costs.
- Check that costs were charged to the project correctly, and that repairs and running costs are not capitalised by mistake.
- Check the date the asset was ready for use, since depreciation starts from then.
- Follow up on defects, guarantees and final settlement with the contractor.
- Record lessons learned for the next project.
For borrowing costs during construction, our borrowing cost capitalisation calculator helps check the arithmetic.
Common findings
- Change orders approved after the work started.
- Cost estimates that were never independent.
- Contract rates not set, so extras were priced on request.
- Ledger costs that do not agree with project reports.
- Capitalised costs that look like repairs or training.
Frequently Asked Questions
When should internal audit get involved?
Earlier is cheaper. A review at the planning stage can prevent problems. Many teams also review at a mid-point and at closeout.
Do we need a technical expert?
Often yes for quantities and quality. Use an engineer or quantity surveyor and review how they reached their conclusions.
Is a project audit the same as a statutory audit?
No. A statutory audit gives an opinion on financial statements. A project audit looks at control, cost and delivery for one project.
Does the same approach work for IT projects?
The stages are similar: approval, vendor selection, change control, billing and closeout. Add review of requirements and testing.
What if we find overbilling?
Document it, quantify it from the contract, and raise it with management so it can be recovered through the contract process. If fraud is suspected, follow your policy and see our fraud risk assessment guide.
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