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Creating value through vendor management 16 April 2014

Creating value through vendor management 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)

Creating value through vendor management

Creating value through vendor management Vendor management risk


Vendors $10-$12 Internal $1

Contracting strategy poses one of the largest risks to

many companies.

Risks

► Performance

► Fraud

► Legal

► Reputational

► Contracting

► Strategic

► Industry

► Geographical

► Operational

Creating value through vendor management Contract risk

Contract Lifecycle

► Vendor selection and contract development

Contracting Strategy

Pros and cons on types of contracts/risks

► Contract administration

Ongoing contract assurance

► Contract closeout


Ineffective control and management of supplier contracts cost

businesses $153 billion per year*.

Effective contract compliance efforts can recover 1-6% of total spends.

* Aberdeen Group, The Contract Management Benchmark Report


Different types of contracts have varying risks

► Contract performance

► Allowances

► Scope change

► Substitution of materials or labour

► Price adjustments

► Rebates (e.g. WCB, etc.)

► Performance based incentive/penalty

Fixed Price / Unit

Rate

► Burden

► Profit

► Labour rates/job classifications

► Costs included in overhead

► Duplicate charges

► Third party charges

Cost Reimbursable

► Material mark ups

► Rates and subsistence charges

► Unauthorized items billed

► Materials charges

► Equipment charges

► Duplicate charges

► Labour rates not auditable

Time and Material

Failure to establish sufficient attention to vendor management may

result in increased contract risk and lead to significant financial losses.



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


Creating value through vendor management 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

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

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.

Contra

cts

are

evalu

ate

d b

ased

on

the

risk a

sse

ssm

en

t crite

ria


Creating value through vendor management 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


Creating value through vendor management 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


Audit 25% Prevention 75% vs.

Creating value through vendor management 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


Creating value through vendor management 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”


Creating value through vendor management EY Major Capital Projects and Contract Risk advisory practice


► Comprised of 15

dedicated individuals

in Calgary

► Varied backgrounds

including

engineering,

construction,

contracts, finance,

tax, accounting,

finance and real

estate.

Team

► Personnel with “boots on the ground” construction/contract experience

► Assist in credentialing internal audit team

► Project Health Checks can identify contracts with issues

Major Capital

Projects 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

Contract risk

advisory

Creating value through vendor management 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


Thank You

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