Table of Contents
- Contract Compliance: Recovering Hidden Value through AI
- Quick Summary: What You’ll Learn
- The Business Impact of Contract Compliance
- The Full Cycle of Impact of Contract Management Services
- Procurement Directors Navigate Contract Compliance Hurdles
- How Contract Management Improves Working Capital Management
- Contract Compliance Audit Process, Findings, and Benefits
- Contract Compliance Audit Review Across Industries
- Intelligent Audits Expand Contract Compliance ROI
- PRGX Contract Compliance Audit Advantages
- PRGX AI-Powered Contract Management Services
- FAQs
Contract Compliance: Recovering Hidden Value
Contract Compliance is a retroactive review of supplier contracts—examining language, billing intent, and documentation to ensure adherence to agreed terms. But today’s contracts are complex, high-volume, and often span multiple systems. That’s where AI and human expertise comes in. Allan Bollam, Sr. Manager of Audit Operations provides a textbook answer on “What is Contract Compliance” in this short video.
Quick Summary: What You’ll Learn
- Why contract compliance audits are essential for recovering lost value and reducing risk
- How AI transforms traditional contract audits—surfacing hidden leakage and accelerating recovery
- Common billing and contract errors that impact working capital
- Why generic and legal AI tools fall short in supplier contract analysis
- How PRGX combines purpose-built AI and expert oversight to deliver 6x ROI
Learn more about Contract Compliance & Optimization in our upcoming webinar for procurement leaders.
The Business Impact of Contract Compliance
Companies today spend a significant amount of their operating costs on suppliers – especially since the outsourcing trend has increased. Fortune 500 companies typically use about 75% of their costs on supplier contracts. On top of this, some industries like utilities or food manufacturing can have 90% or more of their revenue in contracts with suppliers.
All this supplier spend is determined by lengthy contract negotiations, and payment for each service or product is determined by contract terms. But what happens when there is a misunderstanding on either side – the company or the supplier – and the company is charged a higher rate or perhaps for services not used? Assuming the invoice is paid, that is money going out the door that has no value for the company. To prevent these misunderstandings or billing errors, a Contract Compliance review can analyze terms compared to documentation and identify any gaps and future actions for correction.
Contract Management experts apply their experience and AI technology to review contracts and related materials like POs, APs, and invoices against supplier documentation. This provides a clear picture of overcharges, rate discrepancies, or erroneous charges. Even with ERP and CLM systems in place, certain errors can slip through, creating the need for Contract Management Services that usually begins with Contract Compliance.
To understand how “Contract Compliance is Contract Performance” per Keith Rosser, Contract Manager, the John Lewis Partnership, watch this PRGX and CIPS webinar featuring Keith and PRGX experts. In this video, he describes the benefits of Contract Compliance.
The Full Cycle of Contract Management Services
Contract Compliance isn’t the only step in a comprehensive Contract Management Services cycle. The second component is Contract Optimization, which focuses on industry benchmarks and standardization of categories for more efficient contract terms. The final piece is Contract Monitoring, which tracks billings against contract terms in real-time to minimize risk and cash leakage. These phases can occur simultaneously – for example, renegotiating service contract terms while reviewing supply contracts.
A Contract Compliance audit gathers historical information unique to your company and industry, comparing terms to payments and determining recoveries while suggesting future savings improvements based on contract expertise.
Contract Optimization looks toward the future, focusing on renegotiation opportunities, amendments, and ways to simplify the contract and payment process.
Contract Monitoring ensures the work developed in the first two stages translates to on-track payments and minimizes risk. Together, these phases help Procurement, Finance, Supply, AP and other key stakeholders maximize ROI from their spend.
In this video below Contract Management VP Jim Albrecht explains how the three phases of Contract Management aid procurement leaders.
Procurement Directors Navigate Contract Compliance Hurdles
Procurement teams face significant resource and time constraints managing their contract portfolios. Consider that a typical Fortune 1000 company maintains 20,000 – 40,000 contracts – and many of those end up being processed by procurement. Each one requires careful attention during sourcing, negotiation, and payment processes. These teams can benefit substantially from Contract Management Services, particularly Contract Optimization during negotiations and renewals. Creating or renewing a contract demands extensive preparation, from understanding suppliers and their competitors to ensuring vendors can meet company requirements beyond just financial terms.
Even after contract signing, procurement’s work continues. Teams must ensure adherence to contract terms and accurate payments for work completed or products received. Misunderstandings frequently arise – from missed discounts to charges outside agreed per diems. Under-deductions and promotional pricing errors like missing rebates are not uncommon. Global contracts introduce additional complexity with potential errors in tax calculations and currency conversion rates. Even simple mistakes like duplicate payments can occur, and in rare cases, billing fraud.
These errors can significantly impact the bottom line, especially considering that Fortune 500 companies typically have 75% of their spend in supplier contracts. In some industries, like food manufacturing, supplier contracts can represent up to 90% of revenue. At its core, procurement teams aim to deliver value through better contract terms, improved payment accuracy, and trusted partnerships with internal stakeholders. When they succeed in these areas and maintain strong supplier relationships, procurement can unlock additional working capital for innovation.
How Contract Compliance Improves Working Capital Management
When dealing in high volumes, it’s easy for either vendors or companies to misinterpret contract terms or accidentally overpay for services. This leads to financial leakage and reduces working capital available for strategic projects or financial uncertainties. Research from Ardent Partners shows the average company loses 21% of contract cost savings annually – the gap between negotiated and realized savings. Contract Management, including a Contract Compliance audit, can guard against this leakage by closing gaps between sourcing and contracts.
Payment terms present another opportunity for working capital improvement. For example, if your coffee supplier’s payment terms are 30 days while the industry standard is 60 days, a Contract Compliance audit can identify this discrepancy for future negotiation. Extending payment terms by an additional 30 days across different suppliers can significantly increase your company’s available working capital. You may even find that your company is paying invoices early like within 15 or 20 days vs the contractual period of 30 days, this is another way to have more cash available.
Contract Compliance Audit Process, Findings, and Benefits
The process begins with defining the scope between the company and Contract Compliance audit provider. The first step involves gathering supplier data and determining which aspects will be reviewed. A comprehensive audit should include supplier interviews and documentation review to get a complete picture. From there, the audit team performs their analysis using AI technology, working to remove any barriers and verify the original intent of contract terms. The final phase focuses on negotiating amendments, resolving identified issues, and providing recommendations for future savings opportunities.
Key Compliance Errors and Mistakes
Contract compliance errors can stem from multiple sources throughout the procurement lifecycle. Ambiguous or differently interpreted contract terms often create confusion, while system limitations and overlapping technologies can lead to processing errors. The complexity of modern procurement processes and supply chains adds another layer of challenge. Other factors include uncontracted activities, reliance on supplier self-reporting, organizational changes, supplier transitions, personnel turnover, and simple human error.
Even sophisticated ERP systems can’t catch every mistake. Common issues that impact profitability include missed discounts, overpayments, and duplicate payments. Companies frequently discover under-deductions and promotional pricing errors that have gone unnoticed through normal processing channels.
Let’s see how our expert describes how contracts can be misunderstood in this short video.
Benefits of Contract Compliance Audits
Contract compliance audits offer multiple advantages beyond simple error detection. They help assess and improve supplier compliance while reducing both financial and operational risk. Companies can recover past overcharges and improve cash flow, while also reducing future operating expenses. Perhaps most importantly, these reviews help improve contract structure and language to eliminate ambiguity in future agreements.
Contract Compliance Audit Review Across Industries
Any industry can benefit from a Contract Compliance review – including retail, banking, consumer packaged goods, insurance, manufacturing, telecommunications, media and entertainment, oil and gas, pharmaceuticals and utilities. Construction companies face challenges with complex supplier relationships involving materials, equipment rentals, and labor rates that can vary significantly by region and project phase. Similarly, retail and consumer packaged goods companies must navigate intricate supplier networks with varied promotional allowances, rebates, and markdown funding agreements that can be prone to billing discrepancies and interpretation differences.
Logistics
Contract Management Services helped a logistics provider optimize $76M annual labor spend, delivering $7.3M future savings and $5M cash recoveries through enhanced controls.
Manufacturing
The Western Canada based operations achieved $10.5M in total savings with Contract Management Services for an MRO single supplier.
Pharmaceutical
A Fortune 500 pharmaceutical company saved $53M through Contract Management Services, optimizing $800M in clinical trial spend through improved payment processing and controls.
Intelligent Audits Expand Contract Compliance ROI
While many Contract Management Services leverage AI technology to identify anomalies, quick recoveries, and spend insights, the quality of AI implementation varies significantly. Basic AI tools might miss critical contract nuances – even minor terminology differences that could have major financial implications. Separately, these tools may overlook opportunities for volume discounts, rebates, tax refunds, and rate differentials.
An intelligent audit leverages AI models that are continually trained on extensive supplier and contract databases. The system employs metadata analytics with specific contract intelligence, spend insights, and advanced reporting capabilities. However, AI is only as good as its data quality and ongoing training. Like an experienced surgeon versus a first-year resident, the AI’s capability grows exponentially through exposure to diverse cases, becoming increasingly adept at identifying patterns and anomalies.
Crucially, intelligent audits combine this AI capability with human experts who bring years of experience improving contract terms and recognizing billing errors. It’s this integration of advanced AI and seasoned professionals that enables intelligent audits to maximize recovery opportunities and drive contract compliance.
AI in Contract Compliance: Why Generic Tools Fall Short
AI is transforming contract management—but not all tools are built for the job.
General-purpose AI often lacks the commercial context needed to assess supplier agreements. It may flag a 5% penalty but miss whether that’s material in a $5M deal. It treats all services equally, ignoring that a logistics failure costs more than a minor tool outage. And it typically identifies issues after the fact—not during contract execution.
Legal AI tools, while strong in jurisdictional nuance, often overlook financial terms like rebates, payment timing, and volume discounts. They’re not designed to extract cost structures or assess supplier performance.
To truly optimize contracts, companies need purpose-built AI—trained on supplier agreements, guided by experts, and focused on financial outcomes. PRGX Chief AI Officer Amit Dingare explains why general-purpose AI or legal AI tools can’t deliver what purpose-built AI tools can for Contract Compliance.
PRGX Contract Compliance Audit Advantages
PRGX brings over five decades of contract compliance audit expertise across diverse industries, having developed a systematic approach that maximizes recovery while minimizing client disruption. Their comprehensive four-phase methodology begins with careful preparation and stakeholder alignment, followed by detailed planning and data collection, then moves into thorough execution with testing and analysis, and concludes with issue resolution and recovery.
PRGX’s proven Contract Compliance process has four phases:
- Prepare: This initial stage is designed to set the program foundation and confirm the charter, educate and align stakeholders, assess and qualify, and design the program plan.
- Prep and Plan: During the next phase, PRGX will obtain a work order release, acquire your data, finalize the execution plan, engage your suppliers and acquire their data, select samples and perform pretesting.
- Execute: The active audit portion of our process involves testing, interviews and observation, resolving impediments and clarifying intent, preliminary conclusions and solicitation of response.
- Resolve: At the completion of the audit execution, PRGX will present issues to you for approval, release a final audit report, negotiate and resolve all approved issues, and educate stakeholders on the process and outcomes.
This well-structured process typically spans five months from initiation to final recovery, requiring only 1-2 hours of client time per week thanks to PRGX’s experienced auditors and proprietary technology. The cost structure is designed to be self-funding, as recoveries generally exceed the audit investment, with clients typically recovering up to 5% of their supplier spend.
What sets PRGX apart is a unique combination of global reach with local expertise – maintaining staff who understand regional customs, currencies, and languages – along with purpose-built AI technology and in-house certified data privacy and security protocols, rather than outsourcing these critical functions.
PRGX AI-Powered Contract Management Services
PRGX helps companies recover lost value, optimize supplier relationships, and continuously monitor contract performance—using a unique blend of personalized expertise and secure AI technology. PRGX Contract Management Services deliver comprehensive solutions for enhancing contract performance through three key components.
- Contract Compliance: Retroactively capture what’s yours. We process years of activity across your supplier agreements to identify where leakage has occurred—and work directly with suppliers to reclaim missed benefits.
- Contract Optimization: Proactively secure best-in-class terms. We analyze your contract ecosystem to uncover hidden opportunities, then apply those insights to renegotiate smarter deals and prevent future issues.
- Contract Monitoring: Continuously ensure delivery as promised. We monitor contract and invoice data in real time to verify that suppliers are meeting agreed terms—minimizing risk and maximizing value.
AI-Powered Contract Intelligence
At the heart of PRGX’s approach is Contract Insights™ AI, our proprietary platform built specifically for supplier contracts.
Unlike generic tools, Contract Insights™ gives our teams a comprehensive view of your contract ecosystem—centralizing documents, validating versions, and extracting 105+ clause types across cost, performance, and risk.
- It identifies leakage, missed rebates, and rate discrepancies across thousands of contracts.
- It enables scalable tagging, filtering, and opportunity scoring to prioritize recoveries.
- It reveals risks and savings opportunities that manual reviews or static tools often miss.
AI doesn’t replace expertise—it amplifies it. With trained professionals guiding the process, PRGX helps companies move from reactive audits to proactive contract optimization and smarter negotiation strategies.
This comprehensive approach ensures that companies can effectively recover lost profits while simultaneously identifying and addressing process issues that could lead to future financial losses. The combination of experienced auditors, innovative technology, and robust security measures makes PRGX a trusted partner for organizations seeking to maximize the value of their supplier contracts. Ready to transform your contract management strategy? Talk to an expert today.
FAQs
Why do I need a contract compliance audit?
Organizations spend a significant amount of time negotiating supplier agreements based on a shared vision of how those agreements will be implemented. However, over time, system upgrades, personnel turnover and other factors can affect how that agreement is actually implemented – costing you money in the process. An audit ensures that agreed upon terms are still in effect.
Who needs a contract compliance audit?
Any organization that contracts with external suppliers would benefit from a contract compliance audit. The complexities of the supply chain as well as a global supplier base, varying contract terms, siloed functions and fragmented systems make it difficult to ensure that the costs and terms negotiated up front are what you actually receive.
What industries are contract compliance audits good for?
Contract compliance audits are a highly beneficial practice in just about every industry, including retail, banking, consumer packaged goods, insurance, manufacturing, telecommunications, media and entertainment, oil and gas, pharmaceuticals and utilities.
How does AI improve contract compliance audits?
Purpose-built AI accelerates audits by analyzing thousands of contracts and invoices for anomalies, missed rebates, and rate discrepancies. Unlike generic or legal AI tools, PRGX’s AI is trained on supplier agreements and financial terms—delivering faster, more accurate results.
What causes the errors found in a contract compliance audit?
There are many things that can result in compliance errors, including:
- Ambiguous contract terms
- Differing interpretations of contract terms
- System and control limitations
- Incongruent or overlapping systems
- Uncontracted activities
- Supplier self-reporting
- Highly complex procurement process
- Complex supply chains
- Organizational changes
- Supplier changes
- Personnel turnover
- Human error
What types of errors does contract compliance typically find?
Even with the most sophisticated ERP systems, errors can still occur. Common mistakes that result in lost profit include:
- Missed discounts
- Overpayments
- Duplicate payments
- Under-deductions
- Promotional pricing errors
What are the benefits of a contract compliance audit?
There are many benefits of conducting a contract compliance audit:
- Assess and improve supplier compliance.
- Reduce financial and operational risk.
- Recover past overcharges and improve cash flow.
- Reduce operating expenses going forward.
- Improve contract structure and language to eliminate ambiguity.
How effective are contract compliance audits?
PRGX Contract Compliance Audits are an extremely effective way to recover lost profit. Our clients typically get back up to 5% of their spend with a supplier. With many companies doing business with tens, hundreds, or thousands of suppliers, these savings can be significant.
What types of contracts are audited in contract compliance?
PRGX will review your supplier contracts with you to determine where your greatest value will be found, assessing over 25 different risk attributes like spend amount, complexity, past issues, and supplier strategic importance.
What are the stages in contract compliance?
PRGX’s Contract Compliance process is broken down into four phases:
- Prepare: This initial stage is designed to set the program foundation and confirm the charter, educate and align stakeholders, assess and qualify, and design the program plan.
- Prep and Plan: PRGX will obtain a work order release, acquire your data, finalize the execution plan, engage your suppliers and acquire their data, select samples and perform pretesting.
- Execute: The active audit portion of our process involves testing, interviews and observation, resolving impediments and clarifying intent, preliminary conclusions and solicitation of response.
- Resolve: At the completion of the audit execution, PRGX will present issues to you for approval, release a final audit report, negotiate and resolve all approved issues, and educate stakeholders on the process and outcomes.
How do I choose a contract compliance audit provider?
There are many factors to consider when choosing your contract compliance audit provider:
- Expertise and experience – PRGX has been a leader in these types of recovery audits for more than 50 years. We work with more Fortune 1000 companies than any other similar provider.
- Global capabilities– PRGX is truly global, with local staff who know the customs, currencies, and languages.
- Innovative technology– PRGX has proprietary, purpose-built technology that enables faster, more effective audits.
- Data privacy and security – While other providers outsource this important function, PRGX has fully certified data privacy and security protocols managed in-house. We are SOC II and FSQS certified.
Who performs a contract compliance audit?
PRGX Contract Compliance audits are performed by the industry’s most experienced auditors.
How do I prepare for a contract compliance audit?
Your PRGX audit team will walk you through the process, but in general client preparation involves identifying stakeholders and achieving their buy-in, examining your internal processes and determining the scope of work, and gathering the necessary documents.
How much of my time will a contract compliance audit take?
When you partner with PRGX, your time commitment will be minimal. Thanks to our highly experienced auditors and heavy investment in technology, we’ve reduced the amount of client involvement down to just 1-2 hours per week.
How long does a contract compliance audit take?
PRGX Contract Compliance Audit typically takes five months from the kick-off meeting through to final recovery of funds.
How much does a contract compliance audit cost?
While the cost of a contract compliance audit varies based on project size and scope, in many cases PRGX Contract Compliance Audits can be designed to be self-funding. The amount of money we recover generally exceeds the cost, resulting in a net positive for our clients.
Why should I outsource contract management services?
Outsourcing contract management brings specialized expertise to optimize your supplier relationships and spending. External contract specialists use advanced AI and analytics to identify cost savings that typically exceed the investment through both immediate recovery and future savings. They handle large volumes of contracts and are experts in categorization and best practices across contracts and AP processes. The right partner brings industry expertise, experienced professionals, and proven processes that go beyond basic reviews to deliver long-term value through root cause analysis and continuous improvement.
PRGX Contract Management Services
Unlock cost savings, mitigate risks, and drive supplier performance to new heights.
