Not-for-Profits Wanting to Reduce Spend? Take a Look at Contracts
Not-for-profit organizations must be vigilant and careful shepherds of their monetary resources. Sometimes sound financial management takes some outside-of-the-box thinking. Not-for-profits do not have the same avenues to offset rising operational costs that for-profits might. They cannot, for example, raise additional revenue through price increases, product or packaging enhancements, or even service line extensions.
There are cost containment and recovery strategies available however, that could help offset rising expenses. Three avenues in particular may present opportunities to lessen operational spend: construction project contracts, accounts payable practices, and telecommunication contracts.
Construction Contract Reviews
Not-for-profits can significantly mitigate the overspend risks in their construction projects by clarifying contract language to ensure that the terms of work required and delivery expectations are precise.
Organizations will want a clear definition of whether the contract is lump sum or cost reimbursable. A client asked us to review a contract that had landed the client in court. Upon closer review, we found that the contract contained unclear language that allowed for two different interpretations. The project owner interpreted the contract’s pricing model as cost reimbursable whereas the contractor understood the project as being lump sum. The contractor had billed 100% of the full $42 million project bid, but it had only incurred $40 million of cost. Both parties went to court to settle the disagreement over the contract language, and the court had sided with the contractor. A proactive review of the contract may have been able to identify the unclear language and resulted in a project cost that was $2 million less than what the project owner ended up paying for the project.
Be Aware of Third Parties
Another way not-for-profit organizations with construction projects can mitigate financial risk is by having a full view of the contractor’s related party entities. In many instances, contractors use related entities, and if the terms of the arrangement are not clear on the onset of the project, these related parties could become hidden profit centers to the primary contractor.
Anticipate Change Order Pricing: Real World Example
While initial project parameters are competitively bid, change order pricing typically is not. Not-for-profits that anticipate change order pricing at the beginning of a project and establish ground rules can potentially negate excessive labor and equipment costs. Overspend on change order pricing can be significant, as a museum client of ours discovered. During a review of the client’s construction contract, we discovered labor and equipment costs were overstated, and incorrect markup percentages had been applied. We recovered $200,000 for our client.
Understand the Insurance Coverage and Bond Billings
Not-for-profits should have a clear idea of the rates being used for their insurance and bond billings at the beginning of the construction project. An experience that a university client of ours had highlights the role these rates play in the final project cost. Our client’s contractor billed performance and payment (P&P) bond costs at a rate of .75%. On closer review we found that the rate should have been .65%. This disparity allowed the university to recover $250,000.
Accounts Payable Reviews
Construction contracts are not the only area where your not-for-profit may have an opportunity to recover “spent” funds. Less than optimal processes in your accounts payable department may be resulting in over payment or missed discount opportunities that a review could help correct. Evaluating your accounts payable system may also be able to help your organization identify:
- Duplicate payments
- Pricing errors
- Missed rebates
- Unrecorded returns or credits
- Duplicative accounts payable systems
Accounts payable is an area vulnerable to fraud. Undertaking a review serves a secondary purpose in that it signals to employees, vendors, contractors, and other third-party providers that spending is being scrutinized.
Optimize Telecommunications Spend
Comparing what you use in telephony and Datacom versus what your organization’s contract contains may provide an opportunity for your organization to recover overpaid dollars and better manage expenses. A review may uncover if there were any credits not applied to your bill or other errors in billing that could reduce your telecommunications cost.
An evaluation of your telecommunications charges is particularly important when it’s time to renew contracts. There may be alternative plan options with your existing carrier or other competitors that are more cost-effective. We commonly find that a telecommunications review saves clients between 10-30% off their total telecommunications spend, which could mean real savings for your bottom line.
A Review Goes a Long Way
A number of operational expense areas could benefit from a closer look from a professional who understands how items are commonly billed. If your organization is undertaking a significant construction project, has issues with its accounts payable program, or is getting ready to renew a telecommunications contract, now might be the best time to bring in a team who can provide some additional support.
For more information about the cost savings and risk mitigation opportunities for your organization, please contact us.