Contract Auditing | An underused tool in Procurement’s Toolbox?
Contract Auditing
The core aim of any procurement team is to supply the requirement of the business in the most convenient and cost-effective way, in support of its overall business strategy. Their success can be measured by reference to several variables such as price, quality, speed of delivery, customer service and so on. Crucially though, the means to achieve this should always be proactive, rather than reactive. As such, effective negotiation is a key component of the successful procurement process. And any experienced procurement professional will tell you, the best way to get the best deal is to be properly prepared.
Reactive or proactive?
This is where contract auditing can be an important tool in the procurement process. Many see a contract audit as a reactive process, looking at past contracts as a means to recover historic over-charges.
“We’ve changed contract leads so many times during the contract life we’ve lost sight of what we wanted to achieve”
“I don’t have time to dive into the minutiae of the contract when I have so many other priorities”
“I need to understand if our last negotiation realised the benefit that we hoped it would!”
Whilst these are valid reasons to initiate a contract audit and can undoubtedly be good for the bottom line, in reality a contract audit should be used more proactively. The insight gained from an effective proactive contract audit review is what makes it such a powerful tool for the procurement team. The fact these benefits are often under-appreciated, means many procurement teams underuse contract auditing and are at a disadvantage for doing so.
So how can a contract audit help?
Contract audits answer four key questions:
What overcharges exist (if any)?
How did they occur?
Why did that happen?
How can I avoid this happening in the future?
By conducting an in-depth review of an existing contract, the contractor auditor can identify why you have been overcharged, as well as by how much. Contracts and billing processes can be extremely complex, and it could be that a key detail within the contract has been overlooked.
For example:
The auditor may uncover that the total hours charged for temporary staff has included travel to the site, but if this is not within the contract terms then you may have been overcharged.
Delivery charges are another area where mistakes can easily arise: is delivery included in the price for goods or does it vary depending on the load, time or day?
Is there a price review mechanism? Most contracts include a price review mechanism but are these adhered to or is the whole process far too complicated and prone to error?
Correcting errors is a time-consuming process and that time could be better spent on dealing with more strategic issues. Also, if you don’t know why a problem has arisen, it could continue to occur into the next contract. ‘Forewarned is forearmed’, as they say. A contract audit can be a powerful way to ensure that your contract discussions eliminate these problematic areas. Subsequently, any gained wisdom can be used to inform the negotiations for future contracts, giving you the best opportunity to achieve your goals.
A holistic approach
If the contract isn’t clear or has multiple variations, then it is easy for things to go awry. A contract audit will help ensure your relationship is in line with the contract and, in addition, it can also help with the whole contract management process. Sometimes it is the internal processes or environment that are the problem, rather than the contract itself. Frequent personnel changes in the buying team for example can create bottlenecks, as new staff take time to bed in or can increase the risk of errors when approving orders.
The procurement team can’t prevent staff leaving but a contract audit may well highlight that staff do not understand the contracts and need support. These details may well be overlooked by buyers; by contrast, as the sole focus of a contract audit is contract compliance, a contract auditor can identify where errors or mistakes are being made. They can then help identify solutions to support future savings and improve the buyer/supplier relationship.
So if, as a procurement professional, you want more compliant contracts and a better informed contract management process, viewing contract audits as a part of your toolbox could be your secret weapon!
How can we help you?
Visit our contract auditing page to learn more about how we can help you.
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