The Complete Guide to Contract Compliance Auditing

Reviewing your contract compliance program

What is the value of contract compliance

Contract compliance checklist

Common questions and answers

Virtually all businesses rely and depend on other businesses to achieve success, revenue, and ultimately profit. Retail companies depend on manufacturers for products and manufacturers depend on retail companies to sell those products. Commercial businesses must have marketing consultants to maintain brand reputation and identity. Countless businesses provide transportation services, communication services, maintenance services, because other businesses need those services. Regardless of the field or industry, companies depend on other companies in the interconnected network of commerce.

Common practice and sound business operation demands those symbiotic corporate relationships are governed by contractual agreement. Before businesses enter into contracts with one another detailing the terms of the respective obligations, both parties negotiate the provisions to maximize their own benefits while making concessions to avoid losing the contract. Procurement teams work hard to bargain for benefits and secure favorable terms into written contracts. However, all that hard work is for naught if those benefits are not actually realized in the event the other party to the contract fails to comply with the agreed upon terms. In fact, many companies are overcharged millions of dollars over the term of a contract simply due to erroneous invoicing and non-compliance by the other party which seriously diminishes the benefits you anticipated. For these reasons, your company should consider the benefits of contract compliance review programs.

Contract Compliance Review Programs

Contract compliance programs ensure that your company is receiving the benefits you bargained for. Contract compliance also brings visibility at a deeper level of detail which many companies reasonably do not have resources to perform themselves. Most financial teams have controls in place to check that payments on invoices are correct but cannot reach the detail contract compliance provides. The fact remains that most financial or internal teams must operate at a level low enough to catch major issues but high enough to maximize volume and profit. Simply stated: each minutia of detail on every invoice cannot be individually audited for accuracy because it does not make sense from a business perspective. Companies of all levels can benefit from using a third-party contract compliance consultation firm to audit your business relationships and contract compliance with suppliers and vendors.

High-Level Compliance Overview

The general process of a compliance audit entails the following steps:

reviewing effective contractual agreements between parties to identify contract risks,

scrutinizing invoices and line item billing detail,

analyzing the systematic processes to understand internal controls and/or process breakdowns,

identifying areas of non-compliance, accurately quantifying the amount of billing errors, either overcharges or undercharges due to non-compliance issues,

negotiating a settlement to resolve findings, and

recommending possible changes in operation or contract management that would correct non-compliance issues, so those issues are not repeated moving forward and will improve your contract management.



Although the general process is consistently similar, every compliance audit will include nuances, details and risks specific to each contract. A typical compliance audit will take approximately three to six months to complete, depending on several factors such as supplier cooperation, and strength of contractual provisions regarding audit rights and detailed expectations.

One of the most common concerns companies have regarding with compliance audits is how those audits will affect the business relationship between your company and the supplier or vendor. This is a very reasonable concern because suppliers often feel targeted or accused of wrongdoing when being subjected to an audit regardless of what explanation is provided to justify such audit. Effective communication and professional interaction between the contract compliance firm and the supplier being audited is extremely important during the process so that the business relationship is not damaged or harmed in any way. In fact, a well-performed audit of supplier should strengthen the business relationship and both parties can benefit from uncovering unknown issues and trueing up the accounts if necessary.

Given the specialized services of auditors performing contract compliance, generally it does not make sense to employ an internal team to serve this function. Only contract compliance teams composed of professional auditors with certain specialized skills and capabilities including high analytic efficiency, strong verbal communication, and powerful reasoning aptitude can consistently perform successful contract compliance audits. Furthermore, certain tools such as large data analytic tools are vital to a healthy contract compliance team. Keeping such skilled team members on payroll and licensing fees for those tools would typically not be financially viable because those services are not required for every invoice. The most financially responsible approach is to hire a competent contract compliance firm on a contingency fee basis, which is the most common financial arrangement in this industry.

Value of Contract Compliance

Having a successful contract compliance program as part of your company is valuable because it will identify and mitigate contract risks, improve your contract management, and lead to realizing unexpected profit. The primary goal of a successful program is measured by the level of visibility beyond what you already know of a business relationship. Second to this goal is the straight profit of unanticipated receivables in the event of any financial recovery. Bringing visibility is valuable regardless of whether there are financial recoveries because confirming with analytical data that a business relationship is strong and billings are accurate far outweighs the unwarranted optimism that a business relationship is strong. Moreover, identifying a business relationship that is not operating as expected under the contract and regularly overcharging you allows you to end that financial burden and build a healthier business relation.

Compliance ensures that at the end of the day you are receiving the benefits you contractually bargained for in your business relationships.

Contract Compliance Checklist

Here is a simple checklist that will help you understand what is needed to perform a basic compliance audit.

What is your annual revenue?

What is your recovery strategy?

What vendors are you working with?

When was the last time you audited the contract and work performed by your vendors?

How are you tracking billing for your vendors?

How are you preventing your company from fraud? Are you performing internal audits of your own team?

Common Questions and answers about contract compliance:

What is contract compliance?

Contract compliance auditing is the mechanism used by companies to ensure they realize the value they negotiate with their suppliers.

Is your business at a compliance risk?

With any contract, your business may be at risk for contract compliance errors. Determining your risk can vary based on your spend and vendors you are working with. However, there is a high likelihood your business is at risk.

What is the cost of a contract audit?

The cost of an audit can vary for every client. Usually, a contract auditor will look at your overall account and determine your costs. This can vary based on whether or not the auditor is receiving a percentage of overpayment or overbillings collected. In a lot of cases the results of your contract audit will determine the cost.

If you would like more information about a contract audit please download our whitepaper on the right.

What are the benefits of contract compliance?

The benefits of a contract compliance audit are many. It is important to make a regular accounting of all costs incurred by vendors or agencies. Performing a regular audit can help you uncover any discrepancies or issues before they become major.

Contract Compliance Audit Definition

A contract compliance audit is a task performed to monitor and manage contracts. An audit is performed by a person who looks at whether a contract is being honored by the parties who have signed. The audit is used to understand if each party is meeting is contractual obligation.