Audit services for construction companies
Construction accounting is different from almost every other sector we audit. Revenue doesn’t follow invoicing. Costs sit across dozens of sub-contract relationships on different payment terms. Retentions create receivables and payables that won’t settle for years. And the CIS scheme adds a layer of compliance that’s unique to the sector.
These aren’t minor complications. They change the shape of the balance sheet, the timing of profit recognition, and the risk of material misstatement. A general-practice firm can miss things that a construction-specialist practice won’t. We’ve audited contractors and construction businesses for over 20 years, from two-person groundworks firms to main contractors running 50+ live projects. That experience matters when the accounts depend on judgement calls about contracts that won’t finish for another 18 months.
What is a construction audit?
If you search “construction audit” online, most results describe project audits – checking whether a construction project was delivered on time and on budget. That’s not what we do. In our context, it’s a statutory audit of a construction company’s financial statements under the Companies Act 2006. It’s a legal requirement for any construction business that exceeds the audit thresholds (currently turnover above 10.2m, or balance sheet total above 5.1m, or more than 50 employees – meet any two of these three).
The audit examines whether the company’s accounts give a true and fair view of its financial position. But construction accounting is different from standard commercial accounting in several important ways:
- Long-term contract revenue – Revenue on construction projects running beyond a single accounting period must be recognised over time using the percentage-of-completion method under FRS 102 Section 23. The audit tests cost-to-complete estimates, stage of completion calculations, and the expected margin on each significant contract.
- Contract variations and claims – Unagreed variations and claims against clients or sub-contract partners need careful assessment. We consider whether recognition is appropriate and whether the amounts are actually recoverable.
- Subcontractor costs – Construction projects involve layers of sub-contract work. The audit checks that costs are properly accrued, CIS deductions are correctly applied, and trade creditor liabilities are complete.
- Retentions – Retention balances (both receivable from clients and payable to the supply chain) need to be tested for recoverability and proper disclosure.
So while a project audit asks “was this build managed well?”, a statutory audit asks “do these financial statements reflect reality?” Both are valuable. But only one carries a legal opinion.
What does a construction auditor do?
Beyond the standard financial statement assertions, the focus falls on sector-specific areas that general practices may not fully appreciate:
- Contract profitability estimates – are management’s forecasts realistic, or is there a pattern of over-optimism?
- Provisions for loss-making contracts and onerous contract obligations
- Adequacy of warranty and defects liability provisions
- Compliance with performance bond and parent company guarantee requirements on major projects
- Related party transactions between group companies, joint ventures, and director-connected entities
- Going concern risk – particularly for contractors dependent on a small number of large projects
Construction company failures often stem from contract losses that weren’t recognised early enough. Good audit work challenges management’s contract-by-contract assumptions rather than accepting them at face value. That means looking at the detail: comparing forecast margins to achieved margins on completed contracts, checking whether the quantity surveyor’s valuations support the reported stage of completion, and asking difficult questions when the numbers don’t add up.
Long-term contract revenue recognition
FRS 102 Section 23 governs how construction companies recognise revenue on contracts that span more than one accounting period. The percentage-of-completion method is the standard approach: you recognise revenue based on the proportion of total expected costs incurred to date.
The problem is that this relies heavily on estimates. What’s the total cost to complete? Has the scope changed since the last valuation? Are there variations that should increase the contract sum, or claims that might reduce it? Each of these judgements directly affects reported profit.
We test these estimates by examining the cost-to-complete forecasts prepared by project quantity surveyors, comparing them to actual cost run rates, and checking historical accuracy on similar completed contracts. Where a contractor is running multiple construction projects simultaneously, we review the portfolio as a whole. If every single project is forecast to beat its target margin, that’s a red flag worth investigating.
CIS compliance and audit risks
The Construction Industry Scheme creates specific compliance risks that affect every contractor. CIS deductions must be calculated correctly, monthly returns filed on time, and subcontractor verification carried out before first payment. HMRC penalties for CIS errors are automatic and cumulative – a single late return costs 100, rising to 300 after two months, then 10% of the CIS deductions due.
We review CIS compliance as part of the standard audit engagement. We check that deductions match the verified status of each subcontractor, that returns are accurate, and that the company isn’t inadvertently creating HMRC exposure through processing errors. For contractors with high subcontractor volumes, CIS errors are surprisingly common – wrong UTR numbers, missed verifications, or incorrect deduction rates applied because a subcontractor’s status changed mid-year.
Getting CIS wrong doesn’t just create penalties. It creates incorrect creditor balances, understated costs, and potential gross payment status reviews. All of these are audit-relevant.
Stock, WIP and contract balances
Construction balance sheets often carry large work-in-progress balances that represent costs incurred on contracts where revenue hasn’t yet been recognised, or where the stage of completion is still being assessed. These balances are inherently risky because they depend on the same cost estimates that drive revenue recognition.
We test WIP balances by tracing costs to supplier invoices, subcontractor certificates, and payroll records. We also check that the allocation of overheads to specific contracts is consistent and reasonable. Some construction companies carry WIP that’s actually a disguised loss – costs have been incurred but the contract won’t generate enough revenue to cover them. Identifying these situations early is one of the most important things the audit does.
Materials stock on site or in yards presents its own challenges. Quantities are hard to verify without a physical count, and materials bought for one job sometimes get diverted to another. We consider whether stock counts are reliable and whether any materials have been damaged, stolen, or become obsolete.
Subcontractor management and accruals
Most construction companies spend 40-70% of contract revenue on subcontractors. That makes subcontractor accruals one of the biggest numbers on the balance sheet – and one of the hardest to get right. Work may have been done but not yet certified. Applications may have been submitted but not yet approved. Retentions are held back. Contra charges are disputed.
We test subcontractor accruals by examining the gap between work done (per site records or QS valuations) and amounts paid or certified. Where supply chain partners have submitted final accounts that differ materially from the contractor’s own records, we assess whether additional provisions are needed. And we check that subcontractor liabilities include all costs incurred up to the year end, not just those that have been invoiced.
Retentions accounting
Retentions are a defining feature of construction accounting. Typically 3-5% of each interim payment is held back by the client until practical completion (half released) and the end of the defects liability period (remainder released). The same applies down the chain to the trades below.
This creates both retention receivables and retention payables that can sit on the balance sheet for 12-24 months. The audit risk is recoverability. If the client above you goes bust, that retention is lost. After the collapse of Carillion in 2018 and ISG in 2024, the entire supply chain felt the impact through irrecoverable retentions. We test retention balances by reviewing aging, checking whether the retaining party is creditworthy, and confirming that defects periods haven’t expired without release.
Site inspection and physical verification
For material contracts, we carry out site inspection visits to verify the stage of completion. Seeing the works first-hand gives us context that spreadsheets alone can’t provide. If management says a construction project is 80% complete but the site tells a different story, that matters for the accounts.
Being on site also helps us understand practical issues that could affect financial reporting. Delays, disputes, defects, and weather-related setbacks all have cost implications that should be reflected in the contract accounting. We don’t just tick boxes during a visit – we talk to site managers, look at progress against programme, and form our own view of where the project actually stands.
Joint ventures and consortium arrangements
Larger construction projects are often delivered through joint ventures or consortium arrangements, usually structured as separate SPVs (special purpose vehicles). The accounting treatment depends on the legal structure and the degree of control each party has. Under FRS 102, jointly controlled entities are accounted for using the equity method or, in some cases, proportionate consolidation.
The audit challenge is that JV accounts may follow different accounting policies, have different year ends, or not be audited themselves. We need to satisfy ourselves that the construction company’s share of JV assets, liabilities, and results is properly reflected in its own financial statements. Where parent company guarantees or performance bonds have been provided to the JV, these create contingent liabilities that need disclosure.
Going concern in construction
Construction is a high-risk sector for going concern. Margins are thin – typically 2-5% net – and a single problem contract can wipe out a year’s profit. Cash flow is lumpy, tied to certification cycles and retention release dates. And the industry has a higher insolvency rate than almost any other UK sector.
We assess going concern by looking at the company’s forward order book, cash flow forecasts, banking facility headroom, and exposure to individual contracts or clients. Where we see risk – a contractor dependent on two or three large projects, or one facing a significant dispute – we raise it early so the directors can take action before it becomes a crisis. The Carillion and ISG failures both showed what happens when going concern issues aren’t addressed honestly.
Our approach
We’re ICAEW-regulated and on the Register of Statutory Auditors. We plan the audit around your project cycle and certification dates, not just your year end. We understand the stakeholder expectations – from bonding companies and commercial lenders to public sector clients requiring audited accounts as a pre-qualification condition.
Beyond the statutory audit, we provide advisory support on accounting policy choices, disclosure requirements for construction contracts under FRS 102, and the financial reporting implications of new contract structures or JV arrangements.
Fees are fixed and agreed upfront. No surprises. Call us on 0161 832 4451 or request a quote.
