When our clients are customers under "services" agreements, internal operational and procurement stakeholders shift their focus from service delivery management to vendor management. A key part of vendor management includes regular oversight and review of the outputs and outcomes of service delivery. Although meeting service requirements and standards tends to top the list for determining successful vendor performance, another topic at the top of the list is vendor compliance with the financial requirements of an agreement, including accurate and timely invoicing and delivery to budget expectations.
Great performance may be overshadowed by messy financial management, such as inaccurate or late invoicing, missed financial projections, and poor supporting documentation. Timely and accurate invoicing is important to enable a customer to manage its current and future budgets and meet internal accounting requirements. Sloppy invoices increase internal review and validation time, and late invoices cause issues with internal budgeting and accounting activities.
As customers are under tighter and tighter budget constraints and pressure to comply with financial controls, many of our clients are taking financial management more seriously and are looking at vendor compliance with billing and invoicing requirements as a key success metric. The evolving view is that this compliance is really a critical part of the "service" (something that the customer is engaging the vendor to perform), and failure to meet the invoicing requirements should be treated similar to other contract breaches. Examples of key contract provisions that are designed to drive better controls and management of vendor invoicing are set forth below. Although not all of these provisions may be appropriate for every contract, they serve as a checklist when structuring your service agreement.
Key Invoicing Provisions
- Accurate timekeeping and use of claim codes (most appropriate for full-time employees or time-based fee arrangements)
- Obligation to use an agreed form of invoice
- Provision of accurate and timely invoices
- Right to reject invoices and restart the payment cycle
- Obligation to provide proper documentation
- Right to withhold disputed fees
- Stale invoice provisions (i.e., if bills are not issued within a certain amount of days after delivery of the service, then the customer is not obligated to pay the bill)
- Obligation to timely apply credits with a right to offset
- Timely and accurate imposition of taxes
- Right to audit fees and back up documentation
- Obligation to reimburse overpayments with interest
- Service levels for meeting budget forecasts and accurate/timely invoicing (with measurement and reporting obligations and potentially "penalties" for not meeting the service levels)
The services agreement is a strategic mechanism that can be used by commercial contract lawyers and sourcing professionals to enable stronger vendor oversight and management and for encouraging vendor compliance with key financial requirements.
This post is part of our recurring “Contract Corner” series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our previous Contract Corner posts on the Sourcing@MorganLewis blog for more on contracts, and be on the lookout for future posts in the series.