Winning at contract management: The devil is in the unit cost

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Unit costs can be squirrely things.

If you’re a contract database administrator and you don’t validate or confirm invoice unit costs with contractors, at least with minimal regularity, database financial information may be out of date or inaccurate.

And what’s the point of a database if it’s not accurate?

From our experience here at Blueridge Software, Inc. (makers of Contract Assistant), we know that small and simple mistakes on contracted unit costs can create huge differences between contracted and actual costs.

The changes in costs may be completely appropriate and approved, but failing to record the changes can give a false picture of contract costs over time.

It’s not about catching bad guys

And before you think we’re advocating that evildoers get caught, let’s state that errors and mistakes in contract costs over time are usually (the vast majority of the time) not nefarious. Mistakes happen and oversights happen, all without bad motivations on the part of those submitting invoices.

Mistakes simply happen: “fat finger” mistakes move decimal points, cut-and-paste errors happen, or tired eyes transpose a number. Or sometimes adjustments happen that parties agree on – but no one bothers to record in contract terms.

This may seem like a small oversight, but contract managers need to communicate to others that contract reports and financial summaries need to be kept accurate. A few unit cost changes not recorded on a large-volume contract may result in erasing a thin but crucial profit margin.

As long as contracted costs – and appropriate changes to costs – are recorded, the contract manager can assure others in the organization that contract reports and financial summaries are accurate.

A good reason to validate unit costs

Contracts and their financial summaries hold a lot of valuable information, some of which may greatly affect bottom-line decisions.

A perfect example: Let’s say a company wants to upgrade the quality of a product that is being manufactured by a contractor. The cost is more than anticipated, but it is an accurate cost for that upgrade. Can a cost saving be found somewhere else to “pay for” the qualitative improvement? Can another piece or part of another product be manufactured for less? The whole idea may or may not be feasible based on a unit costs buried in another product

Someone in charge of making these kinds of decisions might be tempted to seek the per unit cost from accounts payable … but ultimately this information should be recorded accurately in the contract database – so that’s where the cost investigation should start.

Inside the contract database, too, decision makers can find all the pertinent contact information for a given manufacturer contract. Rather than chasing down phone numbers from emails forwarded by lead contacts … the contract database becomes the starting point for such an investigation.

And a final note of encouragement: Contract managers shouldn’t be shy about reaching out to other departments (such as accounts payable) to ensure contracted costs are accurately reflected on invoices. After all, everyone in a company benefits from a healthier bottom line.

[About the author: Todd Hyten is a former business journalist who now writes about B2B topics and consults on content marketing. You can find him on Twitter and ]

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