After much consideration, planning and risk evaluation you have outsourced all, or a portion of, your FM services to a third party. Most of the time you will get a warm feeling by placing reliance on a trusted FM specialist to provide a good service and charge you the right amount per the contract. However if that feeling is more tepid than warm, you may use your own team to carry out checks, to tell you that you’re being charged the right amount.
The fact is that you may not be aware that you are being overcharged; and more worrying is that your supplier and your own team may also not be aware. You don’t know what you don’t know!
Overcharging by FM contractors isn’t uncommon and can often be a direct result of the low-margin environment that they operate in. Sometimes a contractor will ‘buy the contract’ by pricing the work at wafer-thin margins, expecting to be able to claw-back additional margin, by for example changes in scope, which they may price at a premium. Other overcharges can be genuine misinterpretation of the contract or weakness in controls, but the net effect for you as the client is the same – a contract that does not deliver value for money.
We’ve audited numerous FM contracts on behalf of clients and have identified a common pattern in the way that clients are mischarged, usually resulting in contractors increasing their margins. Below are a few of the most common areas where we can assist clients.
Client issue 1: Lack of confidence around the profitability of the contract and a concern over charging accuracy and potential overcharging
Understanding the nature of the problem and how we can help:
You will probably review and discuss contractor performance (both operational and financial) on a regular basis with your key FM contractors. Reports may be shared (often contractor produced) which often present a misleading view of the service profitability, leading to awkward conversations about uplifting rates, renegotiating contracts, and potentially reducing the service provision. Understanding the cost-base of the contractor however is crucial to understanding whether you are receiving value-for-money and whether you should respond to these demands.
The only way that you as the client can get any transparency of the profit margins earned by the contractor is to invoke your open-book audit rights and delve into the numbers.
We frequently conduct risk based forensic reviews of the actual FM costs presented, as well as a check on the revenue values presented by the contractor – this is important because due to error or local accounting practice it is possible that your contractor’s revenue values (as reported) are not the same as your internal cost values, giving a false impression of the profit margin earned.
Benefits to the client:
Our experience in auditing FM contracts has enabled us to identify and strip out costs that are non-compliant with the contractual terms, and other costs that are not appropriate such as group overheads that cannot be justified by a reasonable allocation model.
The result can often be a more accurate version of the truth that gives you an independent view of actual costs incurred, and once restated the costs are reduced and the profit margin is restated to levels expected for a typical FM contract.
Our risk-based audit methodology is cost effective because it focusses assurance and audit work on those areas of highest risk where we carry out an appropriate level of testing. By targeting assurance resources in the areas that add most value, clients see the greatest return for the lowest audit cost.
The client issue 2: Escalating costs and a lack of transparency around the actual costs being incurred
Understanding the nature of the problem and how we can help:
Sometimes there are issues relating to sudden spikes in out-turn forecasts or in-month charges. When challenged, the contractor explanations appear weak and/or poorly supported. These problems raise further concern as annual budgets are tight and obtaining extra funding involves time consuming internal governance. In order to understand the root cause of the issues you will need a detailed review of the actual costs, interrogated down to transaction level.
We conduct risk-based forensic audits to ensure that costs claimed are accurately presented (i.e. no arithmetic errors or audit duplication), in accordance with the terms of the contract, and are supported by appropriate accounting systems and records (i.e. costs are extracted from the ledger and invoices and other records such as timesheets and payslips support the costs).
Cost checking for core costs can often be relatively straight forward, however certain cost types require accountancy knowledge to better understand how accruals, cost transfers and journals are treated, and how overheads have been applied and whether this is appropriate to the contract. We can also track where costs are moving across budget lines as a result and whether the growth issues are due to rogue costs, poor budgeting, coding issues, inefficiency etc.
Root cause identification is critical in these types of reviews. For example, if we find all costs are compliant with the terms of the contract and the profit margins are wafer-thin and significantly below expectations at tender; then this can indicate non-productive operations managed by the contractor. This in turn often leads to the contractor reducing the resources allocated to the contract, reducing service level outcomes in an attempt to claw back expected margin. We often see this with soft-FM outcome-based contracts, where profit margins are under pressure and to chase margins the contractor resource is reduced to a level that leads to poor outcomes for you as the client and in turn your customers / stakeholder.
Benefits to the client:
The result of an independent actual cost audit will provide a definitive view of actual costs incurred and entitlement against the rules of the FM contract. Once restated the costs are reduced and the profit margin is restated to levels expected for a typical FM contract.
Added to this will be a robust understanding of where and why cost reporting is struggling.
The client issue 3: A gradual but significant move away from planned towards reactive maintenance leading to cost escalation
Understanding the nature of the problem and how we can help:
As the contract progresses there can be a tendency for your FM provider to drive an increase in reactive maintenance costs; plus your own resources may start to be thrown at the operation to meet service levels. If you’ve the potential to earn a ‘gain share’, the likelihood of achieving this will quickly disappear.
You will have a contractual hard FM planned maintenance schedule. You as the client have entrusted maintenance of heating, air conditioning etc. to ensure that reactive maintenance is kept to a minimum. Planned maintenance is cheaper by nature, and avoids middle of the night call out charges, and this is where you should be paying the majority of the costs for the preventative expertise that contractors should provide.
The reality can be very different, with a red flag indicator being a gradual shift over the life of the contract between the ratio of cost from planned to reactive. This indicates that planned maintenance may not being carried out as expected / may not be carried out effectively / the plan may not be comprehensive.
The outcome is likely to be increased cost to rectify issues on a reactive basis, and increased levels of complaints from both internal and external customers – this is a lose-lose situation and is entirely avoidable.
Benefits to the client:
Independent audit can pre-empt these issues is to assess the processes and controls such as robust reporting, and root-cause analysis of the issues causing the spike in reactive maintenance. This can be done early in the life of the contract to prevent issues escalating or once reactive maintenance has grown to a concerning degree – either way the issue needs to be assessed and resolved.
If any of these scenarios sound familiar or you have a commercial issue you would like to discuss confidentially please get in touch for a no commitment chat.
