Case Studies

Issue: At a manufacturer of welded steel structures, scrap related recoveries and costs were incorrectly assessed in cost calculations for a cost-plus contract.

Findings: Connolly reviewed all aspects of the terms and conditions of this multi-year agreement and analyzed each element of cost roll-ups. A diagnostic review of the contractor’s plant operations revealed a significant amount of scrap generation, recovery, and subsequent sale. However the sale proceeds were not being credited back to the client. Labor burden rates included labor to collect and process this scrap to the recovery point. In addition, overcharges occurred in material and labor invoicing because costs associated with scrap processing were being passed along to the client.

Financial Impact: Connolly recovered $800,000 in lost scrap recovery credits.

Solution: Connolly quantified all aspects of scrap related labor cost and scrap recovery revenue. Connolly recommended that a schedule of scrap recovery quantities and values be provided to the client by the supplier on a monthly basis and the supplier’s schedule should be reconciled against the client’s manufacturing logs to ensure accuracy. Connolly also recommended that the material purchase price be adjusted monthly to reflect the resulting scrap recovery value and that overpayment amounts should be credited back to the client. A final recommendation was that labor burden rates be adjusted to correlate with the scrap recovery amounts.

Issue: One client’s supplier of printing services with a cost plus contract included internal freight charges in the actual cost calculation

Findings: Connolly reviewed all aspects of actual cost roll-ups and each freight cost component against contracted terms and conditions, identifying contractor’s freight cost components not specified as reimbursable within the contract language.

Financial Impact: Connolly identified and recovered excessive charges amounting to $2.1 million.

Solution: Connolly reconstructed historical product flows to quantify the costs that were incurred and charged to our client. Connolly recommended freight charges not be contained within the “product cost” line of an invoice, and instead be itemized as a separate charge on all billings for transparency. The analysis resulted in uncovering claims of $2.1 million over the life of the agreement.

Issue: An oil and gas products distributor with a contracted rebate program failed to credit one client for all applicable sales when figuring the volume rebates due.

Findings: Connolly reviewed all sales data for the oil and gas distributors to ensure correct rebate amounts were delivered to the client. It was determined that volume rebates were to be paid annually based on aggregate sales.

Financial Impact: Connolly identified unrealized rebates of $500,000.

Solution: Connolly determined that the supplier excluded over $27 million in low-margin sales to the client when calculating the annual rebate due, resulting in recoveries of $500,000. Connolly recommended that when contracts containing rebate clauses are executed, that they be flagged for regular annual review of rebates due. This helps ensure that purchasing records reconcile with the supplier’s sales records and the resulting rebate is calculated correctly.

Issue: A packaging supplier with a cost-plus contract incorrectly billed its client, adding profit mark-up to freight charges.

Findings: Connolly reviewed all aspects of actual cost roll-ups, including freight charges from a packaging supplier using various freight carriers. This cost item was to be handled as a direct pass-through with no profit margin added, however our review uncovered routine mark-up on all non-UPS and non-USPS freight charges.

Financial Impact: Mark-ups resulting in over $1 million in overpayments.

Solution: This resulted in recovery claims in excess of $1 million. Connolly recommended that contract language be written to support the position that freight is typically billed as a direct cost pass-through, with no additional profit margin added. In addition, freight charges should be itemized as a separate charge on all billings for transparency.

Issue: One of a client’s major catalyst suppliers with very complex pricing methodology excluded Market Price Factor from commodity pricing formula.

Findings: The supplier requested an audit not to seek recovery but to ensure pricing concurrence with the client prior to significant upcoming purchases.

Financial Impact: Hundreds of thousands of dollars in unrealized future savings.

Solution: Connolly’s recommendation to correct the pricing formula resulted in significant future cost savings for the client. Connolly’s analysis determined that the supplier made errors in their computations due to the exclusion of the Market Price Factor (MPF) in the pricing formula.

Issue: The supplier of fuel and fuel services with a cost-plus contract received Federal Excise Tax credits but failed to pass them through to its client.

Findings: Connolly reviewed each element of the supplier’s expenses to determine the client’s “true cost”. Connolly recommended that when contracting for purchases qualifying for tax credits, a special notice be placed in the system to regularly inform users of the need to reconcile taxes. At a minimum, finance personnel should track purchases on a quarterly basis to ensure that proper tax credits are received.

Financial Impact: Connolly recovered unrealized tax credits in excess of $50,000 for its client.

Solution: Connolly analyzed total fuel purchases from the contractor over the life of the contract and quantified “accompanying” Federal Excise Tax (FET) credits for bio-diesel and ethanol purchases. After reviewing the invoice history and determining that the credits had not been passed on to our client, Connolly netted the credits against the fuel charges to determine the actual cost to the contractor.