Audit Provisions in Private Construction Contracts: Which Costs Are Subject to Audit, Who Bears the Expense of the Audit, and Who Has the Burden of Proof on Audit Claims?

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Originally published in the Journal of the American College of Construction Lawyers, Volume 6, Number 2, Summer 2012.

I. Introduction -

Audit provisions are often included in private construction contracts where all or some portion of the work is performed on a cost reimbursable plus a fee basis. In those situations, the Owner wants the right to audit the books and records of the Contractor to ensure that it reimburses only those costs that are properly compensable under the terms of the contract. The Contractor, however, is typically unwilling to grant the Owner audit rights with respect to any portion of the work that is compensable on a basis other than cost, such as unit prices, lump sum prices, agreed general conditions, supervisory labor and equipment rates, and fixed contractor's fee. While an agreement allowing a forensic audit of certain elements of costs but excluding “agreed prices or rates” from the ambit of the audit has a certain logical appeal, it presents dicult and challenging issues when the parties become involved in arbitration or litigation.

This article focuses on some of the legal and practical issues raised by forensic audits of private construction contracts. First, this article addresses the scope of the audit, provides a general overview of the construction audit and discusses the elements of cost that may present issues in the context of a construction audit. Second, the article explores the difficult and related issue of discoverability of documents and records that were expressly excluded from audit under the terms of the construction contract, and whether such contractual limitations on disclosure will be enforced by courts and arbitrators. Third, this article discusses the costs associated with conducting a forensic audit, and the ways in which the recovery of those costs can be addressed in litigation or arbitration. Fourth, the article focuses on the burden of proof in arbitration or litigation over the legitimacy of charges an Owner has previously reviewed, approved, and paid, but wishes later to challenge as not due under the contract. The article concludes by offering practical considerations concerning audit provisions in private construction contracts.

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