Hello from The Orange Partnership

Recently I have been thinking about trust

A respected TOP colleague had asked me to trust her judgement on a certain technical audit issue around which we had slightly different interpretations. I did, and events have shown I was totally right to do so. However, my trust was not blindly given. It was founded on a level of confidence built over 10 years working together on fifty plus complex audit assignments, the fact that she has the highest level of audit and accountancy qualifications, and the strong belief that technically she is probably a better auditor than me!

It reminded me that carrying out assurance activities requires a certain mind-set.?In the professional jargon, this is known as, “professional scepticism”.?

The International Standard of Auditing 200 defines professional scepticism as: “An attitude that includes, a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.”?

It can also be described as balanced but questioning approach which relies on the facts. The article below considers how this outlook can positively support a collaborative contracting arrangement.

Alliances/Partnerships/NEC:?Is there such a thing as mutual trust? How cost assurance can help build a "firm belief" there is

A psychologist friend of mine once explained to me that trust is a personal thing. Some people are naturally very trusting and others are naturally suspicious and wary. This makes the concept of, “mutual trust” a problem. I’m an auditor, and by nature and professional training I am sceptical.?You might trust me completely and without question, but that trust will not be mutual.

In my experience, clause 10.1 of NEC 3 which states that all parties will, “….act in a spirit of mutual trust…..” is often used negatively in practise.?For example, I have heard it used in the context, “Don’t you trust me?” or, “Their actions demonstrate that we just can’t trust them.”

My conclusion is that in complex contractual relationships and where money is at stake, there is possibly no such thing as mutual trust.?It defies human nature.

HOWEVER

If you break it down from an abstract concept, then I believe that trust can be a useful way of looking at things.?“Trust”, according to my dictionary is a, “firm belief in the reliability, truth, or ability of someone or something”.??

For contracts to work effectively there has to be a firm belief in, for example:

• The reliability of defined costs?
• The truth of quotes which support compensation events
• The ability of managers to address commercial issues quickly and effectively
• The ability of an organisation to enter into cost effective subcontracting relationships

Building a “firm belief” through cost assurance

The most effective way of building a firm belief (i.e. trust) in someone or something is to test your own judgements with an objective, independent and expert third party opinion.?In the context of a partnership/alliancing/NEC arrangements, cost assurance fulfils this role.??

By carrying out assurance reviews involving all parties to the arrangement, it is possible to build a firm belief and to build trust.??

If I carry out an independent, expert and objective view of a contractor’s accounting infrastructure, for example and conclude that it is robust, that helps to create a firm belief in the reliability of defined costs.?Even if I find a problem, fixing that issue quickly and effectively will also help to build trust.??

Contrast this with the problem with a contractor’s accounting infrastructure going undetected and leading to an unpleasant commercial surprise such as an unexpected increase in costs.?This will destroy belief and trust.

My second conclusion (borne out by experience) is therefore that cost assurance helps to build trust.?As such it is an essential part of any partnership, alliancing or NEC arrangement.

In our article below, considering red flags in contracts, it cannot be said that Big Al brought a naturally trusting disposition to commercial negotiations, preferring a discretely utilised screwdriver. But that was the 80's. However, to be fair he rarely made a poor buying decision.

My dad Big Al, his screwdriver and 10 red flags your contract could be in trouble

When I was a teenager, in the mid 80’s, my mates and I were all obsessed by cars. Unfortunately this was not a golden age of motoring. Think Mini Metro, the Vauxhall Viva or worst of all the early Skodas. Add to the fact that we could only afford very old second hand cars and you can appreciate that the car buying decision was a difficult one.?

My dad was a mechanic (old term, now called “vehicle engineers”) and was affectionately known as Big Al. Whenever I wanted to buy a car, I would take my dad along with me. And my dad would always bring a screwdriver with him. In those days you could never tell if an old car was made of metal or had been bodged with filler and Big Al’s way of testing this was to walk around the car and discretely flick away at suspect bits with a screwdriver (usually whilst I was chatting to the seller). If the car disintegrated then he would quickly find out. As you can imagine this left many potential sellers quite upset, but as I said my dad was called Big Al for a reason.?

My dad knew that at first glance, any used car can be made to look shiny and new. The thrilling prospect of a new ride can make it easy to overlook subtle variances or red flags that could clue you into a car’s problems lurking under the surface.?

Luckily for me, my dad could spot the warning signs.?The same is true of major contracts. Although I wouldn’t suggest that a screwdriver is always a necessary tool, it is generally good to know how to spot red flags when operating major contracts.?

10 Red flags your contract could be in trouble?

Major contracts can be challenging at the best of times.?You think you are doing all the right things yet there may be signals that things are not quite what they should be.?It may be that you are receiving conflicting or unreliable reports.?Possibly when you ask for information you may not receive it, or you may get something you didn’t ask for.?Worse still, you may have been surprised.?There may have been an unexpected increase in costs without proper explanation, meaning you have to seek further funding and are forced into difficult conversations with your stakeholders.?Your ability to manage may have been taken away by the surprise and you may now have to do the same to your Programme or Commercial Director.?

To help you spot warning signals early on we have compiled a list of potential red flags which could indicate that your contract requires some intervention and steer:

1. You are operating a bespoke contract with ambiguities with regard to scope, language and contract definition. This may lead to disputes over future accountability and contract valuation
2. The contract is underperforming in key areas and basic KPI’s or SLA’s are routinely missed
3. When challenged, your supplier fails to engage their team to improve performance. As the client you are finding it difficult to get face time with the supplier to understand what the real issues are.?Dominant sub-contractors are kept at arm’s length from key discussions
4. Contract data you require is often inadequate, inconsistent and delivered late. It doesn’t adequately explain cost increases or poor performance
5. There are a number of concerns coming through relating to supplier staff. There is a high level of staff churn, often with little prior client consultation and little effective control demonstrated.?You are concerned that staff are not properly qualified or experienced and they appear to lack motivation
6. In the supplier’s invoicing (or applications) there are frequently aggregated costs, manual adjustments and poor descriptions. Often there is minimal transparency and supplier errors repeat, indicating a lack of supplier checking or weak accounting systems
7. There is a lack of understanding of budget v actual cost variances when the supplier cost teams are queried. Further to this, at year-end there is a lack of detailed review making it difficult for you to meaningfully set next years’ budget with cost incentive and reduction initiatives
8. There is limited cost challenge from your own internal audit team whose findings are often not concluded, or the supplier dismisses relevance
9. You hear rumours of poor or slow payment of supplier staff or 3rd?party suppliers. This may indicate insolvency issues
10. At annual review meetings the supplier becomes aggressive when discussing contract price revisions. The supplier constantly moans they aren’t making any money, yet you know the contract tendering process was open and fair

An independent review?

Sometimes it’s good to bring in an expert and independent third party to look at your relationships.??The simple application of a fresh pair of eyes can identify things which may not be achieved in the normal run of business.?Contract managers are often too busy with operational matters and may not have the appropriate audit and commercial skills to uncover issues quickly and effectively.

Preventing audit issues at mobilisation stage is always better, and usually much cheaper, than a deep dive review towards the close of a contract when issues are more complex to unpick and may have grown in value. The video below provides some steer on setting a subcontract up to succeed.

Setting up a reimbursable subcontract to succeed. Three key questions to ask

In this second video of our reimbursable subcontract series we turn our focus onto how to set up a subcontract to succeed and meet our expectation of a RFT Application For Payment – RFT being Right First Time.

Our firm belief is that by Application For Payment (AFP) number three, a subcontractor should be producing an open, transparent and contractually compliant submission, such that it can tick that RFT box.

In the video above I outline the questions to ask of your subcontractor on day one, and how to work together to understand the capabilities of their accounting system and financial controls to meet the requirements of your particular subcontract.

Download our Cost and Commercial Guide to Reimbursable Subcontracts

For a deeper dive into the cost and commercial issues around reimbursable subcontracts, visit our TOP Learning Zone and download our comprehensive guide to reimbursable subcontracts - just click the link below.

That rounds up the August edition of TOPical - thank you for reading. Please do send your feedback and any ideas for future articles. If you have a commercial audit issue you would like to discuss my contact details are below.

ABOUT US

• Specialist Chartered Accountancy Practice The Orange Partnership, was founded on a clear vision to provide maximum transparency over costs in major open book contracts in a way that is most cost effective
• We work collaboratively with project teams to drive transparent and right first time cost applications
• We have worked on some of the largest and most complex cost reimbursable projects in the UK over the last 20 years and currently support clients in the nuclear, defence, energy, transport and utilities sectors
• Our highly qualified and experienced audit team provide real confidence you are not being over-charged by your subcontractors and remove the likelihood of nasty surprises and reputational damage further down the line
• The unique blend of accountancy and commercial knowledge in our team means, when it comes to forensic cost verification, we identify and resolve more issues, more quickly, and therefore more cost effectively, than a generalist commercial resource
• The complexity of your needs and the stage of your subcontracts will determine the nature and duration of support we provide