Types of Audits

The audit appointment is typically scheduled one to two months after your policy has expired. When the auditor calls to schedule an appointment, please return the call promptly even if you’re not yet ready. Its not a good idea to aggravate the auditor as they hold a lot of discretionary power and can make your life difficult. If you fail to get in touch, the auditor can inform your underwriter and your underwriter can cancel your existing policy. In addition, the auditor can actually perform the audit without you and can jack up your existing payroll and subcontractor figures by an assumed amount such as 15%. You’ll then receive a Final Audit bill based on this amount.

There are two types of audits. The first is a self audit or voluntary audit where you receive a form in the mail that you complete indicating the payrolls paid to all employees by classification code as well as amounts paid to all uninsured subs by classification code. The form is sent back to the insurance carrier and they send a final audit bill based on the numbers you reported. Most insurance carriers that insure builders don’t use a self audit because they’re afraid that some builders will underreport their building activity.

During a physical audit, the auditor from your insurance carrier shows up in person to review your records and to ask questions. The auditor may be either an employee of the insurance carrier or a contract auditor who works for an auditing company. Some auditors show up with a laptop that they use to directly input information and they can actually provide the results on the spot after the audit has been completed. However, in many cases, the builder must collect additional information to forward to the auditor before the audit can be completed. A common example would be when a certificate of insurance given to the auditor shows that the policy expired prior to payment being made for a sub’s work and the builder must collect an updated certificate from the sub. Another common example occurs when a builder must go back to a sub to get an exact breakout of material vs labor on an invoice.

The audit can take place either at the builder’s office or at the office of the builder’s CPA or bookkeeper. Regardless of where the audit occurs, it’s critical for an owner or manager to be present to answer questions about specific invoices or the type of work that was performed by each employee or sub. Often times, your in house bookkeeper or outside CPA won’t know how to answer all of these questions and it can result in misclassifications that cost you money.

Depending on the degree of readiness and preparation on the part of the builder, the length of time to complete the audit meeting typically ranges from one to three hours. It can last even longer for large builders with complex operations and multiple business entities.

Most auditors want to perform your audit as quickly as possible and move on to the next job to get their quotas in. If you’re prepared and cooperative, they’ll often help you and give you advice on what you can do to save money. In many cases if you’re a new builder and didn’t understand exactly what you were supposed to do with your records, they may be lenient on the first year’s audit. On the other hand, if you’re not prepared and are uncooperative, the less professional auditors can make your life difficult by not giving you the benefit of the doubt on certain interpretations regarding classification codes or on labor vs materials rules. This can result in thousands of dollars in additional audit premiums.