Creating value through vendor management. 16 April 2014

Transcription

1 Creating value through vendor management 16 April 2014

2 Agenda Vendor management risk Contract risk Audit planning Contract compliance auditing Value add for Company and Internal Audit EY Major Capital Projects and Contract Risk Advisory EY Vendor Audit and Contract Risk Community of Interest (COI) Page 2

3 Vendor management risk Internal $1 Vendors $10-$12 Risks Performance Fraud Legal Reputational Contracting Strategic Industry Geographical Operational Contracting strategy poses one of the largest risks to many companies. Page 3

4 Contract risk Ineffective control and management of supplier contracts cost businesses $153 billion per year*. Effective contract compliance efforts can recover 1-6% of total spends. Contract Lifecycle Vendor selection and contract development Contracting Strategy Pros and cons on types of contracts/risks Contract administration Ongoing contract assurance Contract closeout * Aberdeen Group, The Contract Management Benchmark Report Page 4

5 Contract risk Different types of contracts have varying risks Fixed Price / Unit Rate Cost Reimbursable Time and Material Contract performance Burden Material mark ups Allowances Scope change Substitution of materials or labour Price adjustments Rebates (e.g. WCB, etc.) Profit Labour rates/job classifications Costs included in overhead Duplicate charges Third party charges Rates and subsistence charges Unauthorized items billed Materials charges Equipment charges Duplicate charges Performance based incentive/penalty Labour rates not auditable Failure to establish sufficient attention to vendor management may result in increased contract risk and lead to significant financial losses. Page 5

6 Contract risk Issues facing Alberta companies Overheated market Increased competition for skilled labour Increased scrutiny Regional or global contracts Tighter regulatory, environmental and safety requirements Advancing workforce Page 6

7 Audit planning Risk based vendor selection, prioritized to specific risk criteria Detailed contract documentation review and assessment Collaborative discussions with project teams, Materials Management and other business functions for additional insight and risk assessment Customized audit planning process, specific to contract types Based on the results of this risk ranking, this company can determine where and how to focus its attention on vendor contracts and relationships that present the highest risk potential. Total Vendor Population Number of vendors exceeding agreed spend threshold No Action - low risk vendors Evaluate prioritize high or medium risk vendors Action prioritized audit plan Contracts are evaluated based on the risk assessment criteria Page 7

8 Audit planning How should projects be selected for audit? Size ($ value & physical size) Type of contract Cost Plus & T&M versus lump sum High profile or high risk projects Services offered Experience with the vendor Past audits/performance Contract lifecycle Page 8

9 Contract compliance auditing Compliance audit best practices Stakeholder engagement buy-in/expectation management Planning - detailed audit planning, aligning with company risks Standardization - documented standards around audit procedures and reporting, adds efficiency to audit timing and coverage of risks Governance - increased audit frequency for highest risk vendors, depending on spend and risk Data analytics - leverage data analytics to increase efficiencies Vendors versus contract auditing full vendor activity rather than focus on individual contracts Prevention - preventative measures, as compared to auditing Prevention 75% vs. Audit 25% Page 9

10 Contract compliance auditing Areas of greatest recovery potential Labor (payroll) and labor burden CPP, EI and WCB Rental equipment Materials, supplies and small tools Subcontract costs Travel and miscellaneous expenses Overhead charges / general conditions/ permits and fees Profit and markups Insurance and taxes Average: identify 1-6% cost recovery opportunity Page 10

11 Value add for Company and Internal Audit Cost recovery (typically 4 to 1 ROI) Enhanced assurance around contracting strategy Improvement in internal controls and processes Standardization and enhancement of contracts Enhancement in relationships with key business partners Development of atmosphere of oversight Page 11

12 EY Major Capital Projects and Contract Risk advisory practice Team Comprised of 15 dedicated individuals in Calgary Varied backgrounds including engineering, construction, contracts, finance, tax, accounting, finance and real estate. Major Capital Projects advisory Personnel with boots on the ground construction/contract experience Assist in credentialing internal audit team Project Health Checks can identify contracts with issues Contract risk advisory Team has been involved in assessments of over 300 contracts in the last 3 years. Currently working with several companies in development and implementation of Vendor/Supplier Audit programs Page 12

13 EY Vendor Audit and Contract Risk Community of Interest What is the value of our COI? Learning and development via knowledge sharing across the Community of Interest Peer group networking Timely education on emerging issues and leading practices Informal real-time peer benchmarking of company practices related vendor and contract management, focusing on capital project and operations spend Page 13

14 Thank You Page 14 Presentation title