Year-End Audit Prep for Contractors

Year-End Audit Prep for Contractors

With cooler weather hopefully on the way soon, it’s time for construction contractor audit clients to start thinking about interim fieldwork and that calendar year-end will be here before you know it.  Some key things to make sure are under your belt for a smooth year-end audit are:

Indirect Cost Allocation

Before year-end is a great time to revisit how you are identifying and capturing your indirect jobs costs.  Indirect job costs are costs that aren’t being coded directly to a job but relate to contracting activities.  Some examples of these expenses are:

  1. Equipment Costs – Depreciation, maintenance, and repair of construction equipment.
  2. Insurance – General liability, workers’ compensation, and vehicle insurance.
  3. Wages – Wages for certain functions that may only be partially related to job cost functions.
  4. Rent and Utilities – Costs associated with warehouses, storage facilities and yards.

Allocation Methods

After you’ve made sure all the indirect costs have been identified, make sure you’re systematically allocating the costs to all the jobs during the year.  These costs should then be run through the WIP schedule.  Some examples of allocation methods are:

  1. Labor Hours – Allocate based on number of labor hours spent on the job.
  2. Machine Hours – Allocate based on number of machine hours spent on each project.
  3. Percentage of Direct Costs – Allocate based on the percentage of direct costs incurred by each job in the current year.
  4. Units – Allocate based on units of output (linear or sq. ft).

Reconciliation of Schedule of Contracts

Make sure that all current year job costs, revenues, costs-in-excess and billings-in-excess accounts for both your in-progress and completed jobs are able to be reconciled back to the trial balance.

Job Specific Issues

Make sure that project management or operations has identified any job specific concerns at year-end such as disputes, litigation, unapproved change orders, or any other items containing significant estimates.  Identifying these items up front to your auditors can help save time and unnecessary surprises during the back end of the audit.

Unusual or Extraordinary Transactions

If you have an usual transaction, something outside of the ordinary, or something in a contract that doesn’t make sense to you, before it gets to be year-end is a great time to talk about it with your CPA and make sure that everything is being considered and that the transaction is recorded correctly before year-end.

Having an experienced firm like Melton & Melton who understands your business is essential for contractors.  Contact us for any ways that we can help you navigate the complexities of construction accounting.