Does a Construction Company Need a CPA Audit?

Not every construction company needs audited financial statements.

A CPA audit may be required by:

lenders;
sureties;
ownership agreements;
investors;
regulators;
contracts; or
other stakeholders.

Some contractors also voluntarily choose an audit when the additional assurance supports a significant transaction, ownership transition, larger bonding program, financing event, or period of substantial growth.

The right question is not:

“Are we big enough to need an audit?”

It is:

“Who is relying on our financial statements, and what level of assurance do they require?”

What Is a Financial Statement Audit?

A financial statement audit is an independent CPA engagement designed to provide reasonable assurance that the financial statements are free from material misstatement.

The CPA performs procedures that may include:

risk assessment;
understanding relevant internal controls;
substantive testing;
confirmations;
inspection of supporting documentation;
analytical procedures;
evaluation of accounting estimates;
and other audit procedures.

At the end of the engagement, the CPA issues an opinion on the financial statements.

Does Every Construction Contractor Need an Audit?

No.

Many contractors operate successfully without audited financial statements.

Depending on the contractor and intended users, financial reporting may consist of:

internally prepared statements;
a CPA compilation;
reviewed financial statements; or
audited financial statements.

The appropriate level depends on what outside stakeholders require.

When Might a Surety Require an Audit?

Sureties may require audited financial statements when a contractor reaches certain levels of:

bonding capacity;
project size;
aggregate backlog;
financial complexity;
or underwriting risk.

The requirement varies by surety and contractor.

A contractor using compiled or reviewed financial statements today may encounter an audit requirement as its bonding program grows.

When Might a Bank Require an Audit?

Banks or lenders may require audited financial statements in connection with:

significant lines of credit;
term loans;
acquisitions;
refinancing;
covenant requirements;
or other financing arrangements.

The requirement may appear in the loan documents.

Contractors should understand those obligations before entering into financing.

Investors May Request Audited Financial Statements

An outside investor may want independently audited financial statements before committing capital.

An audit can provide additional credibility around areas such as:

revenue;
profitability;
assets;
liabilities;
debt;
working capital;
WIP;
backlog;
and equity.

The investor may also request additional financial due diligence beyond the audit itself.

Ownership Agreements Can Create Audit Requirements

Construction companies with multiple owners may have operating agreements, shareholder agreements, or other governance documents that require periodic audited financial statements.

These requirements can sometimes remain unnoticed until:

an ownership dispute arises;
a buyout occurs;
succession planning begins;
or an owner requests compliance with the agreement.

Contractors should understand the reporting obligations contained in their governing documents.

Contracts May Require Audited Financial Statements

Certain customer contracts, joint ventures, project qualifications, or other agreements may require audited financial information.

This is especially relevant when contractors pursue:

larger projects;
public work;
joint ventures;
strategic partnerships;
or customers with formal financial qualification processes.

Financial reporting requirements should be identified early.

An Audit May Support a Significant Transaction

Even when no stakeholder explicitly requires an audit, some contractors voluntarily choose one before:

selling the business;
acquiring another company;
bringing in an investor;
transitioning ownership;
pursuing a major financing transaction;
or materially expanding operations.

The audit can provide an additional level of financial statement assurance during a period when outside parties are examining the company closely.

Audit vs. Review

An audit and a review provide different levels of assurance.

A review provides limited assurance.

An audit provides reasonable assurance.

A review primarily relies on:

inquiry;
analytical procedures;
and other procedures considered necessary based on the review.

An audit generally involves more extensive procedures and testing.

If the stakeholder requires an audit, a review will not satisfy that requirement.

Audit vs. Compilation

A compilation provides no assurance.

The CPA assists in presenting financial information in financial statement form but does not express an opinion or provide assurance.

That can be sufficient for some contractors and stakeholders.

But it is materially different from an audit.

The appropriate service should match the user's requirement.

Don't Buy an Audit If a Review Is Enough

A contractor should not automatically select an audit because it sounds more comprehensive.

An audit generally requires:

more CPA time;
more management preparation;
more documentation;
more testing;
and greater cost.

If a surety, lender, or other user will accept reviewed financial statements, an audit may provide more assurance than is necessary.

Confirm the requirement before engaging the CPA.

Don't Provide a Review If an Audit Is Required

The opposite mistake can be more disruptive.

Suppose a contractor completes a review only to learn that the lender requires an audit.

The contractor may now face:

additional procedures;
new engagement terms;
additional cost;
and missed reporting deadlines.

Ask the user of the financial statements directly:

“Do you require a compilation, review, or audit?”

WIP Is Often Central to a Contractor Audit

For many construction companies, WIP is one of the most significant areas of the financial statements.

The auditor may evaluate information such as:

contract values;
approved change orders;
estimated total costs;
costs incurred;
percentage complete;
earned revenue;
billings;
overbillings;
underbillings;
backlog;
and projected gross margins.

Reliable WIP reporting is therefore essential to audit readiness.

Cost-to-Complete Estimates Matter

Construction accounting often depends heavily on management estimates.

One of the most important is:

How much will it cost to finish the project?

The auditor may evaluate:

historical estimate accuracy;
committed costs;
labor assumptions;
material requirements;
subcontractor costs;
change orders;
project delays;
and other remaining costs.

Weak cost-to-complete processes can create significant audit challenges.

Margin Changes May Receive Attention

Large changes in expected job margin may require additional explanation.

For example:

Original expected margin: 22%

Current expected margin: 13%

Management should understand:

what changed;
when it changed;
why the estimate moved;
whether remaining costs are complete;
and whether the accounting reflects the change appropriately.

Revenue Recognition Is Often an Important Audit Area

Construction revenue recognition can involve judgment around:

contract terms;
performance obligations;
recognition over time;
transaction price;
variable consideration;
change orders;
claims;
and measures of progress.

For contractors applying ASC 606, the auditor may evaluate whether revenue recognition is consistent with the underlying contracts and project economics.

Overbillings and Underbillings May Be Tested

Large overbilling and underbilling balances may affect both the balance sheet and the auditor's understanding of project risk.

The auditor may ask:

Why is the job underbilled?
Is billing delayed?
Are change orders unresolved?
Is collection probable?
Why is the project materially overbilled?
What future costs remain?

The accounting should be supported by the WIP and contract information.

Accounts Receivable and Retainage Matter

Construction contractors may carry significant:

trade receivables;
retainage;
aged balances;
disputed amounts;
and customer concentration.

The auditor may evaluate whether those balances are:

properly recorded;
collectible;
appropriately classified;
and adequately disclosed.

Strong receivable management helps both operations and audit readiness.

Debt and Equipment Can Be Significant

Contractors frequently use debt to finance:

equipment;
vehicles;
real estate;
acquisitions;
and working capital.

Audited financial statements may require detailed support for:

loan balances;
interest;
collateral;
current versus long-term classification;
covenants;
and lease obligations.

Internal Controls Matter

An audit is not the same as an audit of internal control unless specifically engaged as such.

However, auditors still need to understand relevant controls in order to plan the financial statement audit.

For contractors, important processes may include:

job costing;
billing;
vendor approval;
payroll;
change orders;
bank reconciliations;
WIP;
revenue recognition;
and financial close.

Weak processes can increase audit risk and create additional work.

An Audit Does Not Replace Good Accounting

A CPA audit is not designed to build the company's accounting records from scratch.

Management is responsible for:

maintaining accurate books;
preparing financial statements;
supporting estimates;
reconciling accounts;
and providing complete information.

A contractor with strong monthly accounting and WIP processes will generally be better positioned for an efficient audit.

What Should Contractors Prepare for an Audit?

The CPA may request information such as:

trial balance;
general ledger;
bank reconciliations;
bank confirmations;
accounts receivable aging;
retainage schedules;
accounts payable aging;
WIP;
completed-job schedules;
contracts;
change orders;
debt schedules;
equipment and fixed assets;
payroll records;
leases;
tax information;
related-party information;
board or ownership records;
and other supporting documentation.

The exact list depends on the contractor and engagement.

How Long Does a Contractor Audit Take?

There is no universal timeline.

Timing depends on:

size;
project volume;
accounting complexity;
WIP quality;
number of entities;
readiness;
prior audit history;
responsiveness;
and reporting deadlines.

A first-year audit may require additional time because the CPA must gain an understanding of the company, accounting processes, contracts, and opening balances.

When Should Contractors Begin Planning?

If an audit will be required, planning should begin before year-end whenever possible.

That allows the contractor and CPA to address:

accounting issues;
WIP format;
revenue recognition;
new debt;
leases;
acquisitions;
significant transactions;
and reporting deadlines

before the close becomes urgent.

Monthly Close Discipline Makes Audits Easier

Contractors that maintain a strong monthly close generally enter year-end in a much better position.

That includes:

reconciled cash;
current receivables;
accurate payables;
updated WIP;
reconciled debt;
current fixed assets;
reviewed job margins;
and complete supporting schedules.

Year-end should be the culmination of the monthly process—not the first time the books are fully analyzed.

What Can Delay a Contractor Audit?

Common delays include:

incomplete WIP;
stale cost-to-complete estimates;
unreconciled accounts;
unsupported change orders;
aged underbillings;
missing contracts;
unexplained margin changes;
incomplete debt schedules;
missing lease information;
and unresolved accounting issues.

Preparation can materially improve the process.

What Does an Audit Cost?

Audit fees depend on factors such as:

company size;
revenue;
number of projects;
number of entities;
accounting complexity;
WIP quality;
debt;
internal controls;
financial statement preparation;
first-year procedures;
and management readiness.

A clean, organized contractor will generally require a different level of effort than one whose accounting needs substantial year-end cleanup.

Can an Audit Help With Bonding Capacity?

An audit does not automatically increase bonding capacity.

However, audited financial statements may satisfy a surety's reporting requirement and provide a higher level of assurance around the contractor's financial position.

Bonding capacity still depends on many factors, including:

working capital;
net worth;
WIP;
backlog;
profitability;
debt;
cash flow;
and management capability.

When Might an Audit Be Voluntary?

A contractor may voluntarily choose an audit when leadership wants stronger external credibility around the financial statements.

Possible situations include:

preparing for a sale;
bringing in new ownership;
seeking institutional financing;
pursuing significantly larger projects;
strengthening governance;
or preparing the business for future reporting requirements.

The benefits should be weighed against the additional cost and effort.

Questions to Ask Before Choosing an Audit

Before engaging a CPA, contractors should ask:

Who requires the financial statements?
Is an audit specifically required?
Would a review satisfy the requirement?
What accounting framework is expected?
What is the reporting deadline?
Will interim reporting also be required?
Does the CPA have construction experience?
Who will perform the work?
How will WIP be evaluated?
What information should we prepare before year-end?

These questions help avoid surprises.

The Bottom Line

Not every construction company needs a CPA audit.

An audit may be required by:

sureties

banks

lenders

investors

ownership agreements

contracts

regulators

other stakeholders.

Some contractors also voluntarily choose an audit when additional assurance supports a major transaction or strategic objective.

The right level of service depends on the intended user and their requirements.

Before committing to an audit, determine:

who needs the financial statements

what level of assurance they require

and

when the report is due.

Then build the accounting and WIP process needed to support it.

How Bilotta & Company Can Help

Bilotta & Company, CPAs, LLC provides financial statement audits, reviews, and compilations for construction contractors.

Our construction assurance work is designed around the areas that drive contractor financial reporting, including:

WIP

job costing

revenue recognition

working capital

bonding

and

banking.

For contractors that need stronger financial processes throughout the year, our Contractor Compass® Financial Stewardship program can also help build the monthly accounting, WIP, forecasting, and reporting infrastructure that supports reliable year-end financial statements.

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This article is provided for general educational purposes and should not be considered accounting, legal, bonding, lending, or financial advice for a specific contractor. Audit and financial statement requirements vary by stakeholder, contract, lender, surety, and circumstance.