A construction contract audit concentrates on three areas that a generic trading or manufacturing audit does not test: whether retention money held back by the customer (typically 5 to 10% of each certified bill, released only after a defects liability period) is still genuinely recoverable rather than quietly impaired, whether the work-in-progress valuation and the percentage-of-completion revenue computed from it rest on a realistic cost-to-complete estimate rather than an optimistic one, and whether revenue recognised for claims and variations — additional amounts the contractor believes it is owed for scope changes, delays or disruption — meets the recognition threshold in Ind AS 115 rather than being booked on the strength of a letter the customer hasn't actually agreed to.
Retention money
Retention is contractually certain in amount but uncertain in timing and, for ageing balances, uncertain in collectability. A retention receivable several years old on a contract long since physically complete is a different risk than a retention receivable three months old on a contract still running.
- 01Age retention receivables by contract, not in aggregateA single ageing bucket across all contracts hides the specific long-outstanding balances that actually carry recoverability risk.
- 02Check the defects liability period against the contractRetention isn't due for release until the DLP ends and any defects are rectified. Confirm the DLP clause and whether the contractor has actually met the conditions for release on contracts where retention is overdue.
- 03Test for disputes that explain non-releaseA customer withholding retention beyond the contractual period is often signalling a dispute — correspondence, defect notices, or a counter-claim. Request correspondence for aged balances specifically.
- 04Assess impairment on retention the same way as any other receivableUnder Ind AS 109's expected credit loss model, aged and disputed retention needs its own loss-rate analysis, not a blanket assumption that retention is always eventually recovered because it contractually should be.
Work-in-progress and the cost-to-complete estimate
Where revenue is recognised over time, it is driven by costs incurred to date as a proportion of total estimated contract cost. Total estimated cost is a forecast the contractor controls, and understating it inflates the percentage complete and therefore revenue — the single largest source of estimation risk in a construction audit.
| Check | Why it matters |
|---|---|
| Compare this year's forecast to last year's forecast for the same contract | A forecast that keeps moving in the contractor's favour every year, with the shortfall never materialising, is a pattern worth investigating directly |
| Trace the forecast to the site team's own cost records, not a finance-prepared summary | The people closest to the work usually know about overruns before finance does |
| Check for provision for loss-making contracts | Ind AS 115 requires recognising an expected loss on a contract immediately, in full, once it is identified — not spreading it over the remaining life |
| Test material and subcontractor costs incurred but not yet invoiced | Unbilled costs are easy to leave out of 'costs incurred to date,' which understates percentage complete |
A contract that has been 95% complete for several reporting periods in a row, with the remaining 5% never actually finishing, is one of the more reliable signs that the cost-to-complete estimate is being managed rather than genuinely forecast.
Claims and variations
Contractors frequently book revenue for additional amounts they believe they are entitled to — extra cost from customer-caused delay, scope changes not yet formally priced, or disruption claims — before the customer has agreed to pay them. Ind AS 115 requires variable consideration, including claims, to be recognised only to the extent it is highly probable that a significant reversal will not occur, which is a high bar for a contested claim.
- Obtain the claims register and classify each claim by its actual status: formally submitted, under negotiation, in arbitration, or merely internally estimated with nothing sent to the customer.
- For any claim included in revenue, look for independent corroboration — a quantum expert's report, a certified interim valuation, or a settlement in principle — rather than relying on the contractor's own assessment of merit.
- Treat a claim still in arbitration or litigation with real uncertainty of outcome as a candidate for exclusion from revenue regardless of how strong the contractor's legal position seems internally.
- Check for claims recognised in a prior year that were subsequently settled for materially less, which is direct evidence about how reliable this contractor's own claims estimates have been.
How we think about this
The common thread across retention, WIP and claims is that each one asks the auditor to test an estimate the contractor has every incentive to make optimistically. None of the three is resolved by recomputing arithmetic — all three need corroboration from outside the contractor's own forecast.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Inventory & stockWork-in-progress valuation in a manufacturing auditStage-of-completion estimation challenges, testing the bill of materials and standard cost build-up, and the physical verification difficulty of WIP.
- Revenue, receivables & cut-offRevenue recognition testing in a statutory auditThe transfer-of-control test that governs when a sale is recognised, the misstatement patterns that recur in practice, and what evidence ties a recognised sale to an underlying document.
- Revenue, receivables & cut-offDebtors confirmation procedure: balance confirmation in practicePositive versus negative confirmation, selection criteria, handling non-responses and disputes, and the alternative procedures that cover the gap when confirmations fail.
- Audit workflow & automationSA 540: auditing accounting estimates, where judgment replaces a verifiable numberAn estimate can't be vouched to a source document the way an invoice can. SA 540 is about what replaces vouching when there's no single right answer to check against.
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- Purchase register checkDuplicate payments, round-sum amounts, weekend-dated invoices, incomplete records.
- GSTR-2B reconcilerMatches your purchase register against GSTR-2B — missing invoices either side, amount mismatches.
- Bank reconciliation checkerMatches your cash book against a bank statement — what's outstanding on each side.
- Fixed asset register checkDuplicate asset codes, missing location or useful life, negative net book value.
- Payroll red-flag scannerBank accounts shared across employees, and records missing an ID, PAN or salary.
- CARO applicability checkerAnswer a few questions about the company and see which CARO 2020 clauses likely apply.
- MSME payment delay checkerMSME-flagged invoices paid — or still unpaid — beyond the 45-day Section 22 limit.
- Related-party transaction screenerTransactions above a threshold you set with no approval reference, grouped by counterparty.
- Depreciation useful life checkerCompares a useful life in use against the Schedule II, Part C indicative figure.
- Materiality calculatorOverall and performance materiality against PBT, revenue, assets or equity, with reasoning shown.
- Sample size calculatorStatistical sample size for a test of controls or a substantive test of detail.