The need to check costs
As companies wrestle with how to achieve financial efficiencies, it is important that they know that the costs being charged by suppliers and contractors are in line with the contract and, particularly under cost reimbursable or target cost arrangements, free from any overcharges.
The traditional approach
The traditional approach to checking costs involves the “substantiation” of transactions on a regular basis by asking for hard copies of supporting invoices or timesheets. The cost checkers will ask for either a sample of documents or a hard copy file of everything. This can run into dozens of files.
The application of the traditional approach creates a need for a team of bums on seats cost checkers.
There is the potential to save two thirds of costs on checking
In my experience it is possible to reduce the cost of checking by about two thirds by moving away from traditional methods which create the need for bums on seats and using a more effective way of checking cost. This approach is based on the approach set out in best practice cost auditing standards, and built on the accountancy profession’s experience of auditing financial information.
Savings can be made by:
Avoiding wasted effort and duplication
The bums on seats, traditional approach wastes money as:
• Checking is carried out regularly, and to the same level of detail, regardless of whether it is finding anything or not
• Checking is usually carried out at a project level rather than a programme level which means there will be an unnecessary duplication of effort as different checkers ask the same questions
• Taking a sample inevitably means checking transactions which represent little or no risk of misstatement
• It is potentially more efficient to test, for example a payroll system, than to look at lots of individual timesheets and payslips
Avoiding wasted time and costs for contractors
To respond to the traditional approach, contractors need to create a shadow team of resources to provide duplicate copies of documents and answer questions. This activity creates additional cost and adds no value.
Avoiding wasted management time
The findings generated by the traditional substantiation approach are often without real justification. In our experience they are frequently based on an inappropriate extrapolation of minor issues or a temporary lack of substantiation. Typically monies are initially withheld and then later paid.
Dealing with these types of findings diverts management’s attention and creates an opportunity cost.
Identifying and dealing with overcharging
I wrote a blog recently which explained why the traditional substantiation approach is of limited value. You can find it in our “Issues and ideas” section under “cost checking – avoid wasting money”.
Perhaps the biggest waste of money this approach drives is that it is ineffective and clients may end up paying contractual overcharges anyway.