Why you should audit suppliers

Wednesday, August 8th, 2012

One of my first assignments for Brian Farrington Ltd was to review an IT project that had got out of control. It was late, incomplete and seriously over budget. During the research phase we asked what was known about the prime contractor and the subcontractor and what due diligence had been undertaken.

The silence was uncomfortable.  It was eventually broken by one of the joint project managers who tried to justify the lack of rigour by stating “its OK , XXX (name deliberately withheld) are doing the majority of the design and build.” XXX were the sub-contractor. XXX were a multinational company.  A few  rudimentary checks had convinced me something was not quite right.

Has the “right of audit” clause been invoked at any time  during the project? I enquired. The response was not unexpected. In fact it is common.  “No we haven’t undertaken any audits.”

We suggested that we should immediately undertake one. Whist the client agreed they were initially unwilling to get involved as it not something they had done before. They were eventually persuaded of the benefits of being in an observer role. It was agreed that an in-house IT professional and a Procurement representative would accompany me, and I prepared them for the visits.

The first audit of the prime contractor discovered a number of anomalies including charging for resources that did not exist.

However the visit to the Sub-contractor, XXX . really shocked the Client’s representatives. The company boasted a Northern Office, a Southern Office a Midlands Office, a Design Office and a Head Office. We approached the Head Office door and rang the bell.

A woman in a dressing gown answered the door and said that her husband (the Managing Director) was at work and we were then directed to the Design Office which was not too far away. The Design Office consisted of a small rented room within the confines of a Charity organisation’s building. It housed two desks one laptop and a desktop plus a server.  Clearly this XXX was not the multinational commonly referred to by the same three letters that the sub-contractors full name was shortened to.  Similarly the grandly titled Northern, Southern and Midlands office turned out to be the homes of part  time sales agents.

The contract was subsequently terminated.

A little due diligence prior to award may have avoided the situation completely. Even an early audit would have flagged up issues prior to costs and related matters escalating.

That is why you should audit suppliers and subcontractors

If you have an audit clause in the contract- use it. If you don’t have an audit clause now consider them for future contracts.

If you need any help give me a call +44 (0)1744 20698 or email me [email protected],com