Contract Inspection: case study
The complexity of business-to-business contracting creates challenges in monitoring and contract performance assessment that organisations may not be equipped to deal with. Whilst management often focus on “the next deal” there are significant risks attached to the performance and finalisation phase of existing contracts that warrant appropriate attention. As a result of this, we are seeing an increase in organisations (both corporate and government) wanting to assess whether they are complying with existing contractual obligations and, in particular, whether they have been overcharged by other parties to a contract.
Historically, Deloitte Forensic has been engaged by numerous clients to undertake Contract Inspections1 relating to the potential overpayment of goods and/or services set out under a specific contract. The Deloitte Forensic team utilise forensic accounting, investigation, computer forensic and data analytic skills to undertake a Contract Inspection. Although each engagement is bespoke the work can include:
- A review of the contract with a particular focus on:
- The deliverables
- The payment obligations
- The audit clause and agreeing with the client’s legal team how to “trigger” the audit clause
- An assessment of the processes and controls in place
- Forensic imaging of computers, email servers and common network drives
- A books and records inspection, including the application of rates, schedules, variations and the payments made and documents supporting / approving these payments
- Data analytics to identify abnormalities and transactions / payments of particular focus
- An electronic document review
- Discussions and formal interviews (where appropriate) in order to obtain further information
- A factual report of findings and quantification of potential over payments.
We were recently approached by an organisation who had taken over administration of several contracts (the Contracts) in relation to the provision of goods and engineering services for a large scale infrastructure project. As our client was not party to the initial drafting and administration of the Contracts, it was seeking an independent assessment to determine if there was any indication of error and/or wrongdoing in relation to the delivery and payment for the goods and engineering services. That is, our client was seeking an independent “health check” of the Contracts and identification of any risks that may exist relating to the past administration of the Contracts.
Following our preliminary enquiries and analysis, we identified a significant disconnect between the terms of the contract and how the Contracts were being fulfilled (i.e. the delivery of equipment / services and payment). Our initial step was to perform a “walkthrough” of the processes associated with the Contracts such as the delivery of goods and services, inventory records, approvals and payments to the supplier. We subsequently analysed the books and records (financial and operational) and the controls in place throughout the delivery of the Contracts by the supplier.
Based on the work performed, we identified an absence of critical processes and controls in place relating to the historical delivery, acceptance and payment under the Contracts. We identified amounts totalling approximately $4 million that had been paid to the supplier that were not in accordance with the terms of the Contracts. We established that, whilst these payments had been approved and paid outside the terms of the Contracts, there was no intentional wrongdoing. Additionally, we identified processes and controls that had historically been lacking. The work performed by the Deloitte Forensic team allowed our client to rectify the absence of critical processes and therefore reduce its reputational and financial risk for the remainder of the Contracts.
In our experience, ongoing and regular monitoring of the performance of any contract is vital to ensure that the contract is executed in accordance with the expectations of all parties. Regular monitoring and testing enables the early identification of unforseen risks and issues that may have arisen during the performance of the contract. If identified early, and if required, improvements may be able to be made to both the contract and the performance phase of the contract to mitigate financial risks and, in some instances, to reduce the risk of any potential reputational damage.
1. A Contract Inspection is a specialist service offered by Deloitte Forensic, whereby we assist clients to forensically analyse processes, controls and financial arrangements relating to contractual terms between two or more parties.
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