10 ways to get your construction business audit-ready

Many construction businesses start as cash-based, family-run operations, where the office manager handles the books, and QuickBooks does the job just fine.

However, as your construction business grows, so do the financial reporting requirements. Lenders and bonding agents may start requesting financials prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and require reviews or full audits, often sooner than you expect. Preparing early can help you avoid surprises, reduce costs, and build stronger relationships with financial partners.

Here are ten practical steps growing construction firms should take to prepare for an audit.

1. Know When You’ll Need GAAP Compliance

Debt agreements and bonding thresholds often require GAAP-compliant financial statements once your debt exceeds around $5-10 million, or when you take on surety bonds over $2 million. (Check your debt covenants to be sure.)

Waiting until your lender or bonding agent demands an audit or review means you’re already behind. About a year or two before reaching a debt covenant is the perfect time to start a conversation with a trusted accounting advisory team.

2. Shift from Cash Basis to GAAP Accounting

With cash basis accounting, you record income when you get paid and expenses when you pay them. It’s simple, but it doesn’t show the full picture, especially in construction, where you might do months of work before getting paid.

For long-term contracts, GAAP accounting provides a more accurate view of your business through the percentage-of-completion method. This approach allows you to report income and cost as the project progresses, instead of waiting until the project is completed or when the cash changes hands. It gives lenders, bonding agents, and management a more realistic view of profitability and performance over time.

In addition, GAAP accounting requires companies to maintain records of leases, equipment, and liabilities. Under Accounting Standards Codification (ASC) 842, for example, lease obligations must be recorded on the balance sheet, which adds complexity and demands organized records.

3. Establish Strong Job Costing Processes

Under GAAP, job cost accuracy is a top priority. You’ll need to track how much each job really costs, including labor, materials, equipment, subcontractors, and overhead, ideally in real-time. This supports reliable budgeting, better resource allocation, and accurate revenue recognition throughout the project lifecycle.

Job costing also plays a major role in calculating percentage-of-completion. If your job costs are off, your revenue will be too, causing problems during audit and making it harder to assess and manage your business profitably.

A strong process includes clear cost codes, a budget for each project, and frequent updates to estimated total costs and revenue. Using job-costing software, updating your numbers regularly, and training your team to allocate expenses correctly will help you stay on track, manage scope changes, and capture change orders promptly.

4. Implement or Optimize WIP Reporting

Work-in-progress (WIP) schedules must be consistent, supportable, and aligned with job performance.

An accounting advisory firm can help you:

• Track billings accurately by establishing systems that align contract values, percentage-of-completion, and billed-to-date amounts.
• Identify gaps in your change order process by assessing how change orders are initiated, approved, priced, and recorded.
• Implement monthly WIP reviews to help identify red flags early and provide insights that improve cash flow forecasting and financial decision-making.

A strong accounting advisory firm will recommend and help you implement improvements throughout the relationship.

5. Clean Up the Chart of Accounts

A well-structured chart of accounts helps reduce confusion and allows your audit and internal reporting to run smoothly.

Start by separating GAAP adjustments such as capitalized interest, finance lease interest, and over- or under-billings from internal metrics like cash flow and profitability. This gives your team and your auditor a clearer view of your financials.

The chart of accounts also helps reconcile the different needs of leadership and external stakeholders. Your management team may focus on daily cash flow and project performance, while lenders and auditors require GAAP-compliant reporting for regulatory and financial accuracy. A clean, strategic chart of accounts bridges that gap and saves hours of backtracking during your audit.

6. Document Revenue Recognition and Capitalization Policies

Create draft policies to guide how your company handles revenue recognition (ASC 606), capitalization thresholds, and indirect cost allocations. These early versions of your procedures show your intent and help auditors, bonding agents, and your own team understand how you plan to handle important financial matters.

ASC 606 affects how and when you recognize revenue. For construction companies with long-term contracts, revenue recognition often aligns with the percentage-of-completion method. The impact of ASC 606 is especially significant when jobs involve milestones, change orders, or multiple deliverables.

7. Keep Track of What You Rent

Many construction companies rent trucks or equipment instead of buying them. ASC 842 requires leases, with very few exceptions, to be recorded on the balance sheet as an asset with a corresponding liability. In addition, the treatment in the statement of cash flows and the additional disclosure requirements for GAAP-compliant financials can be daunting for companies tackling it for the first time.

You will also need to classify each lease, estimate future outlays, and calculate present value. Performing these calculations manually in Excel can be complex and time-consuming, especially with a large volume of leases. In many cases, adopting a lease accounting software is the most practical solution.

Some banks have added clauses in their bank covenants and ratios to factor in the impact of ASC 842, but not all have. It’s important to talk with your bank early in the process to avoid unintended consequences when converting to GAAP.

8. Prepare for Contingencies and Legal Liabilities

GAAP requires you to account for legal liabilities that are probable and reasonably estimable, such as lawsuits, fines, or workers’ compensation claims. Usually, you must also disclose contingent liabilities that are either probable or reasonably possible, even if they can’t yet be fully estimated.

Most cash-basis companies miss these requirements, especially if they just track money in and out. This oversight can lead to audit findings and raise questions from lenders and sureties.

9. Build a Clean Opening Balance Sheet

Engage advisors early to prepare a GAAP-compliant opening balance sheet, set up processes, and convert historical data. This is especially important if your company has high turnover, which can make retrieving and verifying old data difficult.

10. Start Early and Contact the Professionals

Audit readiness takes time. Starting early gives you room to address issues before they become problems, relieve your team from becoming overburdened and burned out, and puts you in a stronger position with lenders, bonding agents, auditors, and future investors or buyers.

We Can Help

Audit readiness and GAAP conversion offer more benefits that just preparing for an audit. Along the way, you’ll gain financial clarity, stronger bonding capacity, and better tools for strategic decision-making.

At Elliott Davis, we help put the right systems in place so you’re ready when it counts. Reach out today to learn how we can simplify your audit preparation and help you deliver accurate, timely financials with less stress.

The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice.  The information above is subject to change.