Reducing the cost of checkers by two thirds
I first entered into the world of checking costs on major programmes delivered using cost reimbursable and target cost arrangements more than a decade ago, as part of a multi-billion pound infrastructure programme.
I was able to reduce the cost of checkers by about two thirds by moving away from traditional methods and using a more effective way of checking cost. My approach was based on the approach set out in best practice cost auditing standards, and built on the accountancy profession’s experience of auditing financial information.
Under cost reimbursable or target cost arrangements, clients need to know that they are paying the right amounts to contractors. They could however be wasting money if they use a traditional approach to cost checking.
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.
A waste of money
The traditional approach potentially wastes money as:
- Contractors need to create manual records which duplicate existing accounting records
- Checking is carried out regularly, and to the same level of detail, regardless of whether it is finding anything or not
- Checking is 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
- It seldom identifies any issues
The traditional approach will miss problems
Although the traditional, “substantiation” method of checking provides some deterrent to potential overcharging and a limited degree of comfort, it is unlikely to find:
- Invoices and timesheets which are duplicated across multiple projects
- Whether the file of invoices adds up to the amount claimed by a contractor
- Issues which will only be identified by looking at the underlying accounting system
- Problems which can only be seen when you look at all transactions together such as lots of small amounts which add up to a big amount which is not chargeable under the contract
- Overcharging from accounting adjustments made through journals
- Missing items such as credit notes for returns, rebates or discounts
- Added value points relating to opportunities to improve efficiency
Enhanced confidence – an alternative approach
A cheaper and more effective way of checking cost is to rely on the approach based on best practice set out in the cost auditing standards, accepted throughout the world, and built on the accountancy profession’s experience of auditing financial information.
The benefits of using this approach are that:
- It saves money. It responds to risk and is therefore a variable rather than a fixed cost to clients
- Provides enhanced confidence by gathering sufficient, reliable evidence in a systematic and professional way
- Problems are found and dealt with early, saving money in the longer term
- It enhances collaboration by avoiding contractors suffering unnecessary work and amounts withheld
The traditional, “substantiation” method of checking costs provides some deterrent to potential overcharging and a degree of comfort. It isn’t however, cost effective as it wastes money and is likely to miss problems.
More than a decade on from my first experience, this approach is still commonly used. There is another approach which provides more effective assurance at a reduced cost, but it requires a move away from tradition.
The approach developed and applied by The Orange Partnership is risk based, robust and based on best practice audit and accountancy standards accepted worldwide.