Imagine discovering a long-time supplier has overbilled your company by millions.
You find this out long after a shutdown, turnaround, or outage project is complete. Vendor invoices? Already paid in full.
Even worse—the construction service firm at fault is one you’ve relied on for years.
Not only will you need to take corrective action to mitigate these findings, but you’ll also have to find a new supplier or vendor.
Is there a way to prevent unsatisfactory audit findings? Is there a path to generating zero comment audits? Let’s look at how those in the heavy asset industry can transform their audit process and close audit gaps.
Why Vendor Audits Are Critical to Your Business
Audits. They evoke fear. Apprehension. They’re also time-consuming and a drain on resources.
Still, they are the way of the world as senior management typically leans on audits to uncover financial savings, overbilling, and unused funds. If you work in a heavy asset industry like mining, chemicals, steelmaking, or pulp and paper, you’ve probably had to prepare or participate in an audit.
Satisfactory audit results are reassuring and confidence-building. Less than satisfactory findings create doubts about an organization, personal integrity, and capabilities. Exposing policy non-compliance can do more than bruise egos but limit careers.
Why are vendor audits so important? For starters, they help to ensure suppliers and vendors operate in a manner that meets expectations and standards. By conducting vendor audits, you can identify potential risks and issues affecting operations and take steps to close those gaps or risks.
Audits Can Improve Owner-Contractor Relationships
Additionally, vendor audits can help your company maintain a good relationship with suppliers and ensure you get the best possible value for your investment.
For example, many oil and gas companies use third-party contractors because of the complexity of the work and their remote site locations. These contractors deliver the necessary equipment and complex services required for projects like shutdowns, turnarounds, and outages.
The SC&H Group note that while these relationships are beneficial, they are also “highly susceptible to contract non-compliance.”
When using an independent auditor like SC&H Group for a contract compliance audit, they will usually dig into contractor charges and accounting records to:
- Determine the root causes of overruns.
- Verify labor costs build up from wage to bill rate.
- Ensure billing accuracy.
- Validate labor and equipment markups.
- Confirm payroll tax compliance.
- Validate per diems.
- Review the accuracy of equipment, small tools, and sub costs.
- Compare gate logs to charges and payroll.
SC&H Group says: “A well-timed audit can uncover overpayments or under-reported revenue, unrecorded liabilities, and missed savings—resulting in substantial margin enhancements and opportunities to improve transparency.”
What can an audit find? In one well-known case, it was revealed that an engineering and construction firm overcharged the Tennessee Valley Authority by more than $6.8 million over five years. The craft labor overcharges had to do with overtime, meal expenses, and incorrect allowances for other workers’ pay.
Timekeeping Errors Can Lead to Bad Audits
In many cases like this, audits uncover errors in contractor timekeeping processes. Example findings include:
- Invoiced work hours exceeded approved hours in the contractor time system (CTS).
- No work hours in the CTS to validate invoices.
- CTS work hours were approved after the invoice was already paid.
Many of these issues originate from paper timekeeping. It’s hard to believe so many firms still rely on paper timesheets while simultaneously embracing tablets, mobile phones, and cloud solutions. Paper systems do not create a reliable audit trail when audit time arises.
For many companies using contractors and vendors, validating the hours that resources spend on-site completing the contracted work is difficult. Timesheets for labor, equipment, and material resources are signed by owner-company representatives and used as a backup during the invoicing process.
You may have an accountable party within your organization who confirms work was performed per the timesheet. However, paper-based timesheets are not based on access control information (gate log data), but instead by a foreman or supervisors documenting total hours based on personal devices such as a watch.
In addition, the need to collect a physical signature can cause team members to perform the unproductive task of finding the accountable person on-site. This person is typically in the field managing multiple jobs in various locations.
Common inaccuracies in timesheets that later turn up in audits include:
- Manual process errors
- Lack of verification for labor, equipment, and material charges
- Lack of contract and skill compliance
As a result, it’s common for audits to show invoices were paid even though they don’t comply with Rates, Terms, and Conditions.
Ensuring Contract Compliance for Audits
Applying the correct, contractually allowed multipliers to hours worked may seem straightforward. But it’s hard when each invoice contains dozens of variables, such as labor classifications, shift schedules, and pay rates.
Say you’re dealing with thousands of vendors, unique contracts, dozens of labor classifications, multiple pay rates, and multiple sites—this all adds up to:
- Errors
- Inaccuracies
- Lack of control
- Lack of contract compliance
- Overspending
The secret to overcoming this issue and saving millions of dollars annually? Using a solution to automate the application of contract Rates, Terms & Conditions to work hours. This automation reduces the probability of human errors, such as mistakes in data entry, failing to pay the lowest rate for equipment, or double billing for the same worker or piece of equipment.
Even better—you should choose a digital solution that integrates with your company’s ERP system, so it imports and applies the correct Rates, Terms, and Conditions.
Not only should those in the heavy asset industry consider digital solutions for audit purposes, but it could also boost their profit margins. McKinsey notes manufacturing digitization could increase profit margins by 3% to 5% if firms can scale these technologies.
Close Your Audit Gaps with TRACK
Shutdowns, turnarounds, and outages typically last 60 days and can cost around $50 million to complete. Of those projects, McKinsey estimates the majority will be 80% over budget and take 20% longer to complete than forecast.
Clearly, the cost of not automating contractor spend is high. Not just in missed deadlines and overspent budget but having to endure the fallout from a bad audit. Many companies choose the TRACK Platform to prevent discrepancies between invoiced hours and CTS hours, thus avoiding bad audits.
With TRACK, you can error-proof the process for validating contractor work hours. TRACK data is a true accounting of the hours contractors spend at the work location as provided by a company’s access control system (ACS). The contractors and owner have agreed to use badge-in/badge-out events as the single measurement method of time on-site.
Ready to take control and close your audit gaps with TRACK? Consistently paying contractors accurately can be worth millions of dollars annually and improve operational efficiency. Get started now.
