Freight Bill Post Audit - What Most CFO's Are Missing
So most likely you fall into one category or another on this issue. Either you recognize that freight bill post payment audit services is a viable option for you, or you don't.
If you do, you realize that the average recovery on freight billing errors ranges from 3% to 8% and you have a strategy in place to recover those freight bill overcharges.
If you don't utilize these services you either aren't aware of the practice of post payment audit recovery, or you don't think it's worth the effort to look into it.
I can tell you personally that freight carriers make a lot of mistakes and most of those mistakes are not in your favor. Many freight vendors today are actually outsourcing their invoicing functions, which ultimately increases the overcharge/error ratio. The number of freight overcharges and the cumulative dollar amounts of those overcharges we see sometimes makes me wonder if the outsourced vendors the carriers work with are compensated on some percentage of the dollar amount invoiced.
Post audit recovery involves certain statutes of limitation concerning the time frame in which you can recover an overcharge. In the absence of any negotiated agreement to extend those times the time limitations which vary by transportation mode and or vendor are as follows:
- Motor Freight (LTL or TL): 180 days from date of delivery
- Air Freight: 6 Months from date of delivery
- Ocean Freight (FCL or LCL): 30 to 180 days depending on forwarder/carrier involved
Most post audit firms work on a contingency basis at 50% of overcharge claims filed and paid. If they don't recover the overcharge, you don't pay for their services.
The essential ingredient for a successful freight bill post audit program is a robust audit trail of contracts, rate publications and other rate documentation from the participating carrier group. If you negotiate your freight rates on the back of a cocktail napkin it's unlikely that post audit will be a successful ploy for you and your company.
Some companies don't use post payment audit services because they feel the have a good outsourced or in-house pre-payment audit system. I tend to favor pre-payment audit systems that detect the error before you pay the invoice for the following reasons:
- Pre-payment audit services are pennies on the dollar, you can either detect a $500 overcharge and pay $.85 for the pre-payment audit or you can pay $250.00 to detect the same overcharge on the post audit.
- Some freight companies can really drag their feet on overcharge claims- why fight for the overcharge if you detect and eliminate it before its paid?
Most CFO's are all over freight bill post audit services and routinely put their paid freight invoices out for post audit. At the same time most CFO's completely overlook a much larger opportunity. Let's call it a "competitive freight audit." It's great to get 25% back on an overcharge occurring on a small percentage of invoices that are billed in error. How much greater would it be to understand that every invoice was 20% higher than it needed to be even if it was correctly invoiced? Just because an invoice is correctly charged for doesn't mean that your not overpaying for freight services.
There are a number of companies who can evaluate your freight spend in concert with your business rules and required service parameters. They can even provide freight cost benchmarking by specific industry so you can evaluate where you are vs. where you could be. A competitive freight audit involves:
- Providing a Complete & Current 30-90 Day Sampling of Invoices
- Providing an understanding of service requirements, business rules and SOP's
With this information a competent TSM (transportation spend management) consultant can create a database model of your current freight invoices. The next step is to apply achievable pricing parameters to that model for annual savings projections deliverable from the design and implementation of a Core Carrier program that meets or exceeds all indentified business rules. The design, and delivery of such a program is also within the scope of a competent TSM consultant.
Every freight invoice should be audited against contract rates, pre or post payment as a standard procedure. Having taken those steps the last and most often overlooked step should be to evaluate and benchmark your freight costs. You'd be amazed at what you may learn!