Poor Contract Management Costs a Fortune

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The International Association of Contracts and Commercial Management (IACCM) has researched the effectiveness of contracts and has found that, on average, they leak value at a rate of 9%. Myself and my colleagues have observed a similar rate of wastage over 40 years of performing contract compliance and forensic investigations into awarded contracts.Many companies incur more than 50% of their costs in contracts (in the case of the Oil & Gas industry this can be up to 70%). One would have thought that attention to 9% of leakage this would be a no-brainer. But no . . . . . .

We (CorGuv Ltd) find the following issues on nearly every audit we perform:

  • Invoices rarely have the supporting documentation to be properly checked against the contract. (in once case we found that, over 5 years, expenditure of £35,000,000, not one invoice had any contractual rates. This meant that it was not possible that any of the 30 people checking these multiple invoices could have checked them properly).
  • Most invoice checkers only cast their eyes over the invoice to spot anything unusual. This, of course, fails to identify systemic problems, which are part of every invoice. Operational staff are often forced into this because they have, neither the time, nor the contractual expertise to understand what needs to be done to check an invoice properly.
  • Managers’ assume that Finance Staff are checking invoices. They are not doing so because it is not their responsibility, and they have, neither the familiarity with the T&Cs, nor the commercial expertise or the time to do this.
  • In our experience, when questioned, different departments believed other departments were reviewing the invoice detail before payment. In practice no one was performing this important role.
  • Busy contract experts are entirely tied up with creating new contracts. Often these are based on existing templates, without assessing the success or otherwise of previous contract using the similar T&Cs.
  • Poorly drafted contracts containing ambiguous or damaging omissions are often directly responsible for value leakage by allowing contractors to overcharge for their services.
  • The proliferation of informal agreements made outside of the contract, verbally and in emails, which undermine the contract because the people making them do not understand the Terms & Conditions. These agreements are often made outside the authority limit of the person involved so this is serious stuff, often putting staff in the position where they could be accused of fraudulent behaviour. (a recent example of this cost a company around £1,500,000 in one single, casual agreement. In another case we found that £350,000,000 had been spent with no agreed rates at all because no-one had updated the contract for 5 years).

The underlying cause appears to be that no-one is directly made responsible for the commercial management of the post-award phase of contracts. So no-one notices the, non-compliances, errors, and inefficiencies which result in value leakage. Therefore no lessons are learnt to be fed into the preparation of new contracts. This lack of governance is costing most companies dearly and yet it remains wilfully opaque.

The result of this is two-fold:

  1. Value Leakage is not detected and contract costs are therefore more than they should be.
  2. The virtuous cycle of create-measure-learn-improve is broken and there is no improvement in contracts. (We have actually noticed that contracts terms have deteriorated over the years, as expertise is lost and fewer resources are allocated specifically to dedicated contract jobs.)Some organisations are picking up on this but the majority do not even want to discuss it.

And yet the leverage of a relatively few number of contract compliance staff is huge and pays for itself in cash recoveries many times over. (our contract audits pay for themselves in most cases. On average the return on investment is 600-700% in cash recoveries; and even more in internal control improvements).

The unwillingness to face the issue seems to be related to a few reasons:

  • The treatment of contract compliance staff as a cost, rather than an investment.
  • Resistance of thinking beyond contract award.
  • A lack of awareness of contract/cost management.
  • Defensiveness of the current management who do not want to be exposed as having allowed wastage on their watch.

So the question we raise in this article is,  

“What can be done to raise the profile of this problem and stem the leakage of value from contracts?”

This issue affects anyone with contract commitments, including government departments, councils, ministry of defence, and the oil industry.

Your Thoughts, Please . . . . . . . ?

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