Contract auditing definition
/What is a Contract Audit?
Contract auditing involves an examination of the written arrangements with suppliers. The intent behind a contract audit is to ensure that the amount and quality of goods and services delivered to the customer was correct and that the customer was billed an appropriate amount. A possible result of a contract audit is that the supplier is required to deliver additional goods and services, or that it must rebate a portion of its billings.
A contract audit can also involve a review of the processes used to enter into a contract. The intent is to spot any weaknesses in the process that might result in a poorly-designed or badly-priced contract.
Types of Contract Audits
There are many types of contract audits, of which the following are the most common:
Preaward audit. A preaward audit is conducted before a contract is finalized to evaluate the fairness and accuracy of a contractor’s proposal. It helps determine if the proposed costs are reasonable, allowable, and compliant with regulations.
Postaward audit. A postaward audit reviews a contract after it has been awarded to verify that the contractor is complying with the terms and that charges are accurate. It may uncover overbilling, noncompliance, or improper cost allocations.
Incurred cost audit. This audit examines costs the contractor has already incurred and billed to ensure they are allowable under the contract terms. It is commonly used in cost-reimbursement contracts.
Forward pricing audit. A forward pricing audit evaluates a contractor's projected costs for a future period to determine the reasonableness of those estimates. It is used to support negotiations for fixed-price or cost-type contracts.
Contract closeout audit. This audit is performed when a contract is completed, verifying that all contractual obligations have been met and final payments are accurate. It ensures that all financial and performance-related matters are resolved before closing the contract.
Defective pricing audit. This audit checks whether the contractor provided accurate, complete, and current cost or pricing data at the time of contract negotiation. If defects are found, the government may seek a price adjustment.
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Advantages of Contract Auditing
There are several important advantages associated with contract auditing. They are as follows:
Acts as a deterrent. The threat of a contract audit is a useful deterrent to keep suppliers from overbilling or under-delivering to a customer.
Obtain rebates. Any negative findings resulting from a contract audit can result in possibly substantial rebates being paid by the other party.