Contract auditing allows parties to know their obligations and follow them thoroughly. However, what is it?
In this article, we will discuss what contract audit means. We will tell you the purpose and the different types of auditing contracts. Also, we will tell you how to prepare for contract contracts.
Once you are done reading this article, you will be able to understand the importance of audits in your contract. Thus, it will enable you to ensure that all parties are compliant with the requirements stated in the contract.
I have created a free-to-download, editable procurement contract template. It’s a set that includes a PowerPoint file and a Word file. You can use and tailor them to your needs when contracting with a supplier. I even created a video explaining how to use the templates.
A contract audit refers to the process of assessing and evaluating performance or information, which verifies that the parties involved in a contract have fulfilled the standards or specifications outlined in the contract.
It involves analyzing the terms and conditions of a contract to ensure that both parties are meeting their agreed-upon obligations and that the terms are being executed according to what they have written in the contract.
These audits are performed based on the agreement between the parties, as specified in the contract, and not as a legal requirement, unlike audits required by law.
Contract audits typically involve reviewing various documents, similar to a project review, and may concentrate on specific departments or particular areas during the audit process.
Performing contract audits is crucial for any growing business. However, it is an overwhelming task that many businesses see as a burden. Contract audits require a significant amount of attention and a considerable time commitment.
Furthermore, contract audits are an effective tool that can help you control costs, promote quality, and strengthen your relationship with the other parties.
Contract audits have multiple purposes that include the following:
Contract audits guarantee that your business is not overpaying or underpaying as agreed in the contract, and ensure that costs are accurately recorded. This process can aid in forecasting and help legal and finance teams better control expenses.
Identifying even small errors can help you avoid inaccurate billing and help optimize your financial performance.
Additionally, the audit can identify opportunities to negotiate better rates during contract renewals by assessing and managing costs on a case-by-case basis.
Conducting contract audits proactively is an efficient way to recognize potential problem areas and risks before they worsen.
For instance, checking if there are billing errors at an early stage can prevent the accumulation of unexpected expenses, which could severely impact revenue.
Similarly, identifying any unfulfilled contractual obligations at an early stage can prevent non-compliance from escalating into a potential legal dispute later on.
Contract audits offer a vast amount of valuable data that can help businesses make more informed decisions about contracts, their terms, and the procedures involved.
The audit can guide improvements in internal processes and enhance the overall quality of the contracts. Furthermore, it can identify specific opportunities to increase revenue or reduce costs that align with the company’s strategy.
The audit can also highlight clauses that require updating, either to comply with regulatory changes or to reflect the direction of the company’s growth.