Contract Risk

30 May 2016

Cost Cutting is the ‘Topic du Jour’– But are you missing some significant cost savings right under your nose?

The global economic down turn and falling commodity prices have made their presence felt in all market segments with natural resources companies initially feeling the pinch followed closely by mining contractors and mining services organisations, flowing down to retail, households and consumers.

Media attention has been focussed on the resources sector and its varying strategies around cost reduction, diversification and efficiency measures.  With headlines featuring ‘penny pinching’, cut backs on soap, locking stationery cupboards and schemes encouraging staff to develop and embrace novel cost saving ideas such as replacing disposable plastic snack boxes with reusable ones, there has never been a better time to take heed of the current economic climate and examine the strategies available for driving revenue growth in your business.

Whilst perhaps not as headline grabbing as slashing jobs and freezing salaries, one area where the potential to unearth substantial cost savings exists, is around third party contract costs, involving a detailed review of the risk management processes and procedures associated with these contracts.

Third Party Contract Costs

The use of third parties to carry out a variety of functions is not confined to the resources sector with many organisations from Government agencies to construction companies engaging in third party contracts and outsourcing activities.

In light of the current economic climate, the importance of contract management has never been more vital. In my last article, I outlined the various types of contracts reviews available and the benefits of such reviews. 

In considering third party contract costs a good starting point in order to gauge the magnitude of potential concerns is to address the questions outlined below:

  1. What proportion of spend is performed by third parties?
  2. Can you explain or provide, in detail, processes you have to validate expenditure charges and your variation / change order process?
  3. For each third party provider, how many contract variations / change orders have been made and what is their value?
  4. What level of autonomy is provided to “site” or “project” personnel to manage third parties?
  5. Who reviews and validates third party charges? For example Finance, Procurement, Project or Site.
  6. For all third party providers, what is the basis of their charges? For example:
    • ​Reimbursable
    • Cost (with or without mark-up)
    • Milestone
    • Schedule of Rates
    • Time and Material
    • Lump Sum.
  7. What level of documentation to support charges is provided by third party providers and what is retained?
  8. How often and how many invoices have been rejected by your organisation.

A thorough review of the issues outlined above is likely to highlight potential contract risks and may in fact point to instances of non-compliance by vendors to agreed contract terms, over charging or perhaps incidences of fraud, bribery or corruption.

Do you have in place the necessary rigour and controls around cost validation and adequate levels of accountability as it relates to contract variations and change orders?

Where now, perhaps more than ever - every dollar counts, can you afford not to scrutinize all potential cost saving opportunities that can impact your business in both the short and longer term?