Audit Clauses and Construction Contracts
Following recent case in the Technology and Construction Court, the extent of information that employers are able to request of contractors through audit clauses has become a major topic in debates relating to construction contracts.
It is important for construction and professional companies to understand what information they are obliged to present to their client employers under an audit clause. Audit clauses in construction contracts have nothing much to do with accountancy. They are clauses that oblige the contractor to provide all sorts of information to the employer and often to allow the employer to send auditors into the contractor’s offices to look through its records.
Similar clauses are often put into consultants’ appointment contracts. There is nothing to stop the employer’s chosen auditor being a construction litigation lawyer, who is handling, or preparing, litigation against the contractor. This can be a very useful tool producing documents and evidence far beyond the normal scope of discovery.
A contractor often fears a spate of single issue adjudications, which it might lose for lack of the hard information If, however, the contract contains obligations for the contractor to maintain proper records and a widely drafted audit clause, this can dramatically change the outcome
It can allow the other side to audit all information “relating to” the performance of the contract and it also allowed the audit of “information, records or documents ..’ which cover a wide range of documents.
Documents are considered to relate to the performance of a contract even if they are not required by the contract to be maintained as records and even if they are not generated as a natural part of doing the work. Therefore, internal reports produced months after the event by a team appointed to investigate the project and report to the Board, on the project team’s performance, were subject to audit.
Information about payments to subcontractors and suppliers can be subject to audit even though it was a fixed price contract, because such information can be understood as relating to the performance of the contract – the issue is what the audit clause says, it is simply a contractual test.
Documents can be audited even if they are commercially sensitive. Wide purposes will be set out to justify the clause followed by widely expressed requirements for disclosure, with a confidentiality clause included in the contract to cover off any commercial confidentiality arguments. There is no realistic prospect of contractors being able to get these widely drafted audit clauses deleted. Nor is there much prospect of contractors seeking to have their wording cut down.
Indeed, the best thing contractors can do is assume that more or less everything will be auditable, except legally privileged documents. Lawyers should therefore be involved in discussions as soon as it appears that something might “go legal” – certainly they should be involved before people start producing reports which might show that the contractor had done something seriously wrong. To some extent contractors will proceed on this basis anyway in light of the possible discovery process should a matter go to litigation, but audit clauses are contractual so they can go wider than litigation discovery. Moreover, they can kick in without warning, with no need for any formal legal process beforehand. Contractors have to ensure that all of their staff operate with this knowledge.
The final insult is that producing all of this information costs the contractor a fortune. Many employers would concede that contractors should be entitled to payment if requests for audit information result in costs above a given level, or require more than so many days’ work, but that often is not in the first draft of an audit clause, and few contractors think to ask for it when tendering. Structure