At any major health care system, it is important that the Accounts Payable department monitor the expiration of contracts and service agreements. This is a crucial task as many contracts can be modified or canceled before the expiration date. These service agreements and maintenance contracts may be paid in advance as well.

If the Accounts Payable department is not informed when a contract is modified or canceled before its expiration, any credits may be overlooked. If the Accounts Payable department does not monitor the expiration of contracts and service agreements, they may not know to follow up with a vendor. As a result, credits owed may not be issued by the vendor.

Canceled Service Contracts Can Cause Overpayment

During a recent Discovery Review, The Audit Group found that Seimens Medical Solutions had three Overpayment Claims from canceled service contracts, totaling $37,366. The Accounts Payable department was unaware of the

The Accounts Payable department was unaware of the cancellations on these contracts because they were not monitoring contract and service agreement expiration. As a result, Accounts Payable did not know of the credits due to the vendor. The vendor was never asked for credits or issue debit memos against these payments owed prior to our review.

As a solution, Seimens Medical Solutions now has a process in place to inform Accounts Payable on any modified or canceled service agreement or contract. These overpayments will not be missed in the future, and the organization will no longer leave money on the table.

TAG’s Tips to Monitor the Expiration of Contracts and Service Agreements

• Develop a process to promptly inform the Accounts Payable department when an agreement has been canceled or modified, to limit overcharges.
• Emphasize that key department personnel should keep Purchasing and Accounts Payable updated on all modifications, cancellations, or expirations of contracts and maintenance agreements.
• When a multi-period Purchase Order is required:
  • Use one line for each period of expected payment
  • If each payment period will be the same amount, reflect this on the PO as the number of units. (Example: Monthly payments would be 12 units, and quarterly units would be 4 units.)
  • Note each expected payment unit as received, so Accounts Payable can pay the service charges for that time unit.
  • If costs for an agreement need to be adjusted, cancel the remaining Purchase Order lines for the units of services not yet performed. Add lines to the Purchase Order to reflect amended charges.
  • Keep all Purchase Order adjustments in one place for easy reference and tracking.
  • Use the Purchase Order Notes field to create clear explanations of any changes.

Does your Accounts Payable department need help to develop a process to monitor contracts and service agreements? TAG is here to help! A Discovery Review from The Audit Group can help to uncover missed payments and overpayments due to contracts and service agreements. Contact Sunshine Prograis at the link below, or continue reading for more TAG Cash & Cost Management Tips.