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Contract compliance audits are an effective way to win back historical cash losses. But as good as traditional audits are at identifying recoveries, the value they can realize is only a percentage of what’s been lost.
And the longer the timescale between transaction and recovery claim, the less that’s recovered. Customers are rightly starting to question if there’s a better way. By moving from a reactive to a proactive footing, businesses can stop cash from going out the door in the first place.
New methodologies are shaping today’s commercial compliance audits, enabling companies to stop the leaks instead of trying to catch all the drips. Here we’ll look at them in more detail.
Making Audits Deliver More
Contract compliance audits are an effective way to identify past leakage and recoup losses through claims. The number of errors uncovered can be significant, but the volume of recoveries generated by traditional audits can obscure how many errors are recurrent.
Decades of experience combined with advances in technology are now transforming the traditional audit into an opportunity to uncover underlying issues in billing compliance that let repeated overpayments slip through.
When those are identified, sustainable long-term controls can be implemented that stop losses before they happen.
By diagnosing the root cause of a problem, you can cure it instead of endlessly treating its symptoms. Value is maximized when the root causes of gaps are mitigated, and leakage is prevented rather than recouped after the fact.
There are five essential methodologies for rooting out and correcting recurring errors:
01 Pre-event Analysis
This involves an evaluation of the critical risks around three common triggers for payments errors: before a contract is awarded, before a project begins, and before invoice payment is processed.
02 Diagnostic Analysis
Here auditors look for problems in client systems around contract language, invoicing processes, and operational controls so they can be mitigated faster.
03 Accelerated Audits
These are similar to traditional contract compliance audits but engineered to execute quickly and stop significant leakage sooner.
04 Real-time Audits
This is where auditors go out into the field to conduct ‘live’ audits while specific activities are underway.
05 Specific-risk Analysis
Targeting known problems related to the sector or business type within contracts and designing procedures to mitigate them.
Proactive Audits Are Already Delivering Value
The owner of a multi-year construction contract recently implemented a preventative contract compliance program for the build of a 3-million square foot facility.
A joint venture contract was in development for two construction firms, covering a scope of work that included 920 acres of land, 8.3 million cubic yards of earth that needed moving, and a budget of $1.5 billion.
Monthly invoicing included costs for the two general contractors, plus 35 sub-contractors. There were 600 orders made from the site each day on average. Monthly pay allocation included hundreds of pages of documentation.
Each invoice included multiple change orders — over 300 on one particularly complex invoice — each with backup ranging from one page to several hundred pages. Tracking these changes and associated cost builds was very challenging. PRGX had to ensure that non-allowable costs were excluded and that all work had been completed.
Given the scope of the project and the scale of the budget, conducting a traditional, recoveries-focused audit at the end of the project would have been incredibly difficult and time-consuming.
Pre-award analysis revealed several issues related to auditing rights and cost definitions; in particular, significant non-allowable costs attached to many of the rates being charged.
On labor rates alone $7 million in preventive savings were secured for the contract owner. Additionally, more than $4 million in savings due to payment error prevention were secured.
The Power Of Prevention
By diagnosing the root cause of a problem, you can cure it instead of endlessly treating its symptoms.
Traditional contact compliance audits haven’t lost their essential value. In fact, the process of identifying historical recoveries enables auditors to conduct the risk assessments needed to determine where systemic issues are hiding. Gathering that intelligence is vital to optimizing contracts and stopping money from going out the door.
The added scrutiny suppliers find themselves under can also lead to self-correcting behavior. If they know a proactive contract compliance audit process is in place, they’ll be more likely to treat invoices with the rigor they deserve. Any lazy assumptions built into a supplier invoicing process (‘well, they paid it so it must be approved’) will also wither away if they know that anomalies will be challenged.
The proactive audit approach developed by PRGX combines decades of human experience with advances in technology. Both are enabling our contract compliance auditors to use what they learn and uncover contract and process issues that cause value leakage.
Want to Learn More?
Download the Commercial Compliance Audits: From Reactive To Proactive white paper or watch the Commercial Compliance Auditing: Moving from Reactive to Proactive webinar today.