Assurance Insights: Navigating Financial Complexities in the Construction Industry

The construction industry faces a unique set of financial reporting challenges, driven by project-based operations, variable cash flows, and shifting economic conditions. In this environment, reliable assurance services, such as audits and reviews, play a critical role in helping construction companies maintain financial transparency, meet stakeholder expectations, and support sound business decisions.

This article highlights several key assurance considerations for construction companies and how they can support financial clarity and operational efficiency.

Revenue Recognition: Managing the Complexities of ASC 606

One of the most significant accounting standards affecting the construction industry is ASC 606, Revenue from Contracts with Customers. This standard requires contractors to assess performance obligations, estimate total project costs, and recognize revenue based on the transfer of control, often using a percentage-of-completion method.

These estimates are central to the accuracy of financial reporting. During assurance engagements, auditors evaluate how management determines estimated costs, handles change orders, and applies consistent practices across contracts. This level of scrutiny helps ensure revenue is neither overstated nor deferred improperly, both of which can impact performance metrics and stakeholder trust.

Work-in-Progress Schedules: A Window into Project Performance

A contractor’s work-in-progress (WIP) schedule is one of the most important financial tools available. It provides insights into whether jobs are over- or under-billed, whether loss contracts are being monitored, and how backlog and project timelines are evolving.

From an assurance perspective, WIP schedules are closely reviewed for:

• Timely and realistic updates to job cost estimates
• Accurate calculation of earned revenue
• Early identification of project risks and profit fade

Regular and accurate WIP reporting not only supports the audit process but also gives management better control over financial planning and project management.

Internal Controls: Protecting Project and Corporate Integrity

The decentralized nature of construction work, often involving multiple job sites, subcontractors, and field personnel, can introduce internal control risks. These risks are heightened when procurement, payroll, and billing processes are handled outside of centralized accounting systems.

An assurance engagement often includes a review of internal control systems to evaluate:

• Whether job costs are allocated correctly
• If segregation of duties is in place for key financial processes
• How change orders, pay applications, and lien waivers are managed

Strong internal controls help safeguard assets, reduce the risk of fraud, and ensure compliance with contract terms and regulatory requirements.

External Stakeholder Expectations

In today’s construction environment, financial statement users include lenders, bonding agents, investors, and project owners. Each of these stakeholders relies on credible financial reporting to assess a contractor’s ability to complete projects and manage financial risk.

A well-executed assurance engagement provides the financial clarity needed for:

• Securing financing and bonding
• Prequalifying for new work
• Supporting ownership transitions or strategic growth initiatives

Assurance reporting also demonstrates a contractor’s commitment to financial integrity and operational accountability.

Looking Ahead: Adapting to Economic Shifts

As the construction sector responds to a range of challenges, from rising material and labor costs to interest rate pressures, having timely, reliable financial information is more important than ever. Assurance services help construction companies stay financially agile by validating assumptions, surfacing risk areas, and supporting informed decision-making.

Whether it’s through an audit, review, or advisory support, assurance can offer a clearer picture of financial health, which is valuable not only during the reporting period, but throughout the year.

‍