Today's businesses are under increasing pressure to enhance their bottom lines. Have you ever asked yourself if you are getting the most out of your contracts? Shocking but true, countless dollars are lost each year because suppliers, distributors, and licensees fail to meet their contractual obligations.

Here is how you can be proactive in helping your organization to enhance its contracts, whether through revenue recovery or reduced costs.

1. Improve Communication with Contractual Parties

Many contracts are complex and vague and, in most cases, underreporting of revenues or overcharging for goods or services provided by third parties is the result of miscommunication, misunderstanding, or even a lack of incentive to report accurately. Regardless, inaccurate reporting of revenues or charges can have a powerful impact on your bottom line. Ensure that the contract requirements are well defined and will lead to a proper understanding by all parties. A meeting with representatives of the contractual party at the onset to discuss the terms and conditions and reporting requirements of the contract is also well invested time, and can help improve understanding by all parties of their rights and obligations.

2. Provide Reporting Tools

In contracts with self-reporting requirements, provide a reporting template tailored to the metrics to be used in the calculation of the revenue owed by the contractual party, to help ensure the proper information is used to calculate all required fees. The number of registered users, servers, and employees are examples of metrics often used in software license agreements. In service contracts, request detailed information on the calculated fees (e.g., time by activity, time by category of personnel) or applicable rebates on most-favoured customer contracts.

3. Consider a Review Program

A Contract Compliance Program is an important control measure over the self-reporting information and/or contractual charges. Not only does it address the risk of under-reporting by the customers or over-charging by the suppliers, but if done properly it can also be a great way to improve communication between parties. It can help educate customers to better understand their needs. A Contract Compliance Program should consider on-site review and testing of reported information by a third party to determine the validity of the reported information, to help monitor compliance, to identify errors, and, ultimately, to help recover lost revenue or overcharges. Use a risk-based approach to select customers or suppliers for audit to focus on key issues from a compliance standpoint.

4. Include Audit Provisions in Your Contracts

Making compliance a top-down priority signals to everyone that compliance merits serious attention. Audit provisions should be part of the contract to state your intentions and rights. Without contractual consent, your right to audit is subject to legal interpretation and ambiguities. A broad discussion of how non-compliance findings would be resolved and possible penalties may be included.

5. Use a Third Party to Conduct the Reviews

You should consider the benefits of using a knowledgeable and qualified independent third party to perform the reviews. They may bring resources, experience, and dispassionate execution to an otherwise demanding engagement. An independent party may help maintain and even improve relationships between business partners, and reduce tension and mistrust. This can lead to an improved return on investment, better protection for your intellectual property, and greater business partner relationships combined with improved compliance.

6. Make it a Learning Experience

If a compliance review indicates that the customer or supplier did not report properly, identify the source(s) of the problem and where the process went wrong so it can be corrected going forward. Done properly, compliance reviews can provide opportunities to help customers and suppliers to better manage their contracts.

Jocelyne Lafreniere, CA, Associate Partner

To contact Jocelyne, e-mail Jlafreniere@kpmg.ca or call 613-212-2861.

Jocelyne is the Leader of the Contract Compliance Service (CCS) practice within KPMG's Advisory practice in Eastern Canada. KPMG's CCS practice offers specific contract services that cover a range of contractual compliance obligations, such as royalty compliance services, software end-user license reviews, reseller and distributor reviews, construction contract reviews, and most-favoured customer compliance.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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