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:
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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.
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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.
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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.
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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.
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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.
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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:
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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.
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Obtain rebates . Any negative findings resulting from a contract audit can result in possibly substantial rebates being paid by the other party.
