How would you evaluate the reasonableness of estimated costs to complete on a construction contract for audit purposes?

• A. Compare estimated costs to known milestones, supplier quotes, and historical project data; test sensitivity of estimates; corroborate with third-party quotes.
• B. Based on last year's data only
• C. Use random sampling of costs
• D. Use budget only

Answer: (A)

Evaluating reasonableness of estimated costs to complete relies on grounding the estimate in current, project-specific information from multiple independent sources and stress-testing the assumptions to reflect uncertainty.

Using known milestones provides a solid progress anchor tied to the contract’s schedule, while supplier quotes bring in up-to-date market rates for materials and subcontracted work. Historical project data adds a reality check by showing how similar activities performed in the past, including typical productivity and cost patterns. Testing the sensitivity of estimates to key drivers—such as material price volatility, labor rates, and productivity assumptions—reveals how far the total cost could realistically move under different scenarios. Corroborating the estimate with third-party quotes adds external validation, reducing the risk that internal biases or incomplete information skew the numbers. Together, these elements create a robust, evidence-based estimate that supports reliable financial reporting and audit conclusions.

Relying only on last year’s data can misrepresent current conditions or scope changes; random sampling may miss material cost items or drivers and isn’t designed to establish overall reasonableness; using only a budget ignores actual market conditions and execution performance, and can be biased.