Found Money:  Contract Compliance Reviews Can Recover “Lost” Funds

By Mike Colella & Tom Risi

Financial Support Services

Universal Advisor, 2003 Issue No. 2

Maybe it was an errant $20 bill lying on the ground.  Maybe you reached into your back pocket to find a $50 you didn’t know you had.  Or maybe you were going through an old wallet or purse and — lo and behold — Ben Franklin smiled up at you. 

Most of us have found money on at least one occasion, but to say it’s a rarity is an understatement. It also happens infrequently in business.  When’s the last time your business “found” a few thousand dollars lying around? 

However, there is something you can do to “find” cash and preserve profits.  Consider conducting regular and timely contract compliance reviews.  Contract compliance reviews have resulted in significant monetary recoveries and cost savings for our clients.

Contract compliance reviews focus on the following five key areas:

1. Adequate agreement documentation:  It’s crucial that executed contracts contain all the information necessary for a business to run smoothly and position it for quality billing and terms reviews.  Contracts should clearly state parties and their respective responsibilities, pricing, billing, and collection terms, while detailing delivery and other special terms.  Additionally, change order processes and agreement amendment conditions need to be adequately addressed in the contract.
   
   
2. Compliance with billing and payment terms: Missed opportunities in this area have a direct effect on your cash flow, interest costs, and financing needs.  Are you financing your customers?  Are your suppliers financing you?  Are you maximizing opportunities for progress billings, advanced billings, or change orders?  Are you taking advantage of early payment discounts?  Are you paying unnecessary financing charges?  The right answers to these questions could be the difference between adequate liquidity, profits, and losses.
   
   
3. Long-term agreements: Some entities engage in long-term contracts or customer/supplier “partnering agreements,” containing special cost reduction and pricing goals that may be spread over the life of the contract.  It can be challenging to monitor these changing terms since they occur over long periods, and often the change triggering events may not be easily tracked or measured.  Key systems in your organization (purchasing, accounting, and customer service) should be integrated to automatically monitor and measure contract compliance and term changes. 
   
   
4. Bundling of contracts: Contracts may be much easier to administer when a select few proven suppliers or customers provide multiple products/services, as opposed to contracting with multiple parties involving new relationships.  Often volume discounts and other economies of scale can be negotiated in these circumstances.  Additionally, there may be opportunities to reduce processing and monitoring costs with such relationships.  Business strategy, risk analysis, and other economic decisions are certainly necessary in determining the number and nature of suppliers and customers you do business with, but working with parties with similar values and proven working relationships can have huge payoffs.
   
   
5. Pricing and special terms analysis: Obviously pricing errors may lead to direct recoveries, but special terms and ancillary charges/services often present additional opportunities.  Typical items such as container, packaging, freight, product testing and other non core service charges can produce significant economic findings.

Given today’s emphasis on lean organizations and the fast pace of business, it’s easy for contract compliance errors to occur.  As our experience has shown, substantial savings and cost reductions can be derived from an effective and timely contract compliance program.  Whether you’re looking for advice in how to approach an internal contract review function or are looking for a partner to provide this service for you, our contract compliance specialists can help.  For more information, contact Michael Colella at 248.223.3611 or Tom Risi at 248.223.3608.