Ready to make a New Year’s resolution that sticks? While losing weight and eating healthy top the list year after year, let’s focus on saving more money through effective vendor management — a core competency in ensuring your organization receives the quality services you requested at the cost you expected.
Through the years, Stinnett’s vendor audit experts have identified situations that cost companies millions of unnecessary dollars. Working alongside our clients, we have helped improve their controls, reduce risk and increase quality by avoiding costly future mistakes.
So which controls make the most sense for your organization? That largely depends on which services your vendors provide as well as the size of those services, such as large construction projects. To help kick-start your 2019, here are 10 vendor management tactics you need to know.
Enhance your Contracts!
Add an audit clause.
An audit clause is a statement that allows you to audit your vendor when you deem necessary to verify all costs are legitimate and allowable. A good clause will indicate how long they must keep all original receipts and documentation and to what detail.
Be clear about how changes are to be handled.
Verbiage should be included that explains what are considered covered changes, such as modifications that result in increased cost to the quality of originally specified materials, and how those are to be approved BEFORE they are implemented.
Succinctly state what can be marked up.
We constantly find problems in this area. Although a standard markup may be acceptable for third-party outsourced services, limitations should be set to protect you from unwanted additional costs such as markups on per diems, subcontractors who are affiliated with the contractor and contractor- owned equipment.
Be clear on who is responsible for mistakes or substandard materials.
This is important to ensure that, at a minimum, you have legal recourse to pursue recovery of costs for these situations. We also recommend you include an explanation of how disputes are to be handled.
Plainly spell out what per diems are allowed and who can receive them.
As I frequently state in my conference presentations, per diems have become a “playground” for some vendors. Limit who can receive per diems in your contract and what situations are allowed. Per diems should offset employee travel costs and be limited to employees who are traveling a sufficient distance to the job site.
On large projects, we recommend you withhold an amount from each invoice (typically 10 percent) that will be paid at the end of the project once you are satisfied all the work has been done as required and the contractor has proven the subcontractors have been paid.
Now that we’ve covered contract enhancements, let’s dig into a few general recommendations we make to our clients.
Agree upfront on all rates and how rate changes are approved.
Rates should be clear for all types of services to be rendered as well as equipment to be used, like backhoes, bulldozers and forklifts.
Thoroughly vet new vendors.
Perform background checks on the company, verify their articles of corporation with the state, and conduct a financial health check on the vendor before engaging them on a critical project.
Pay close attention to incoming invoices. |
Review rates charged against approved rates, look at costs to see if they make sense and are reasonable, and examine per diems and markups in accordance with the contract.
Implement a program to periodically audit your vendors.
This will not only identify problems that you can’t detect just by looking at the invoice, it sends the message to your contractors that you are serious about contract compliance.
Segregate vendor approval and invoice approval.
This is a big fraud prevention control! The person who adds and oversees vetting and adding vendors is not the same person who reviews and approves invoices.
Vendor management is a much bigger issue than most companies realize. Stinnett can help your organization design a system of controls that can greatly improve your ability to effectively manage and monitor your vendors. Reducing exposure to fraud and overbillings sets the stage for a happy new year!
About the Author
Jeff Dehart is a Principal with Stinnett & Associates with over 30 years of experience in both Audit and Information Technology. Jeff manages Stinnett’s Vendor Audit Services, offering clients vendor process management consulting, vendor audit and fraud or vendor investigation support. He is also a Certified Internal Auditor, a Certified Information Systems Auditor, a Certified Fraud Examiner, a Certified Business Continuity Professional, and a member of the Institute of Internal Auditors (IIA) and the Information Systems Audit and Control Association (ISACA).
Stinnett & Associates is not a CPA firm.