Compliance to the terms and conditions of a contract is critical for avoiding liability and being ready for future opportunities. Contract managers typically are those in charge of ensuring compliance, and are required to monitor expenditures and payments outlined in the financial terms of a contract. Key contract management and administration activities include ensuring compliance with the contract terms and conditions themselves, ensuring compliance with federal regulations, effectively communicating with involved parties, guiding the outcome of the contract lifecycle, quality assurance, managing and negotiating contract changes, and resolving claims and disputes and eventually proper invoicing resulting in timely payment.
Overlooking the Post-Award Phase
If all the aforementioned activities were not responsibility enough, contract and administrators must also make sure that compliance is maintained during the post-award phase. The three most common contract non-compliance situations which occur during the post-award phase are: overpayments, under-reported revenue, and unrecorded liabilities, which can lead to missed savings and liability issues.
If a business is payed more than what is specified in the terms of the contract, and those payments are retained (intentionally or not), it is considered non-compliant with False Claim Act (FCA) rules. Regardless of whether a false statement was generated to conceal overpayment, and regardless the overpayment amount being fixed or not, it is FCA non-compliant. Organizations who knowingly retain the overpayment after the due date, or for 60 days, whichever occurs later face potential FCA liability or if 60 days after identification of the overpayment, whichever is later.
For more information on this see DLAPiper.com.
For a contract manager, it is crucial to continue to monitor the financial clauses and terms of a contract even after it is successfully executed. Best practices for this aspect of the contract lifecycle is to use an automated software system that generates automatic alerts.
Under-reported revenue, if done deliberately, is usually for the purpose of avoiding taxes, and is illegal. Under-reported payments has at times, resulted in such far reaching consequences as prison terms and enormous fines and penalties.
Under-reporting the revenue gained through payments defined in contract financial terms can have very far reaching effects. This under-reported revenue influences not just the individuals involved, but also can detract from the value of the business as a whole, and any possible future prospects.
“The Internal Revenue Service estimates that underreported business income accounts for more than $100 billion per year in unpaid taxes. Because the IRS says that $100 billion represents about 80 percent of the tax gap, underreported income and overestimated expenses are scrutinized carefully. While the potential tax ramifications are considerable, the effects on the value of a closely held business can be far more consequential in the long-term.” (http://mhpcpa.com/publications/underreporting-income-far-reaching-effects/)
Regardless of whether the under-reported revenue was intentional or not, the IRS will still scrutinize and fine a company heavily that is found to be under-reporting revenue. Contract managers can play a crucial role in ensuring that revenue collected during the post-award contract phase is correctly accounted for. As with overpayments, contract managers and administrators can more easily avoid contract overpayments by automating the process with software.
Unrecorded liabilities are any goods or services that were provided that were not reported as a liability. It is easy to miss things here. Occasionally an invoice will arrive late, have a mistake, or simply slip through the cracks. Typically, to find these unrecorded liabilities auditors will look through subsequent checks to find goods or services that should have been recorded on a earlier report. When auditors look through a companies accounts payable, they will search here for any unrecorded liabilities. Though no company is perfect, the success of passing this portion of the audit will depend largely on how many of a company’s actual liabilities are unrecorded.
A contract manager can ensure that no liabilities go unrecorded relative to the contract they manage by again, automating the process to track financials and generate reports with a few mouse clicks.
Compliance in the Post-Award Phase
The post award phase of the contract lifecycle should, contrary to popular practice, not be treated as “contract success” and be forgotten about. Future opportunities and avoiding liability are contained in the successful management of this crucial phase of the contract lifecycle.