How to Tell If a Supplier Is Overcharging You

How do I know if a supplier is overcharging us?

You know by comparing what each supplier billed with what your company agreed to pay, invoice by invoice and line by line, rather than by looking at the total you spend with them. Overcharging means billing more than the agreement allows: a higher unit price, a fee the agreement does not permit, a larger quantity than you ordered, or the same invoice sent twice. Often it is not fraud at all, just errors that nobody on either side had a reason to catch. The same comparison works the other way too: when every invoice matches, it is the proof that nobody is overcharging the company, which is as good a result as money found.

What are the signs of supplier overcharging?

The clearest sign is a price for the same item that rises between invoices without a signed document explaining why. Other signs are new fees that appear without warning, such as fuel, handling or administration charges, and quantities larger than your team ordered or received. Totals that do not add up from the lines above them, deposits that are never credited on the final invoice, and two invoices for the same delivery are signs too. Spending that grows faster than the business is a reason to look, although it proves nothing by itself.

Why does nobody inside the company catch it?

Because the person approving an invoice usually checks that the goods arrived, not that the price matches the agreement. The agreement, the signed document or order form that sets the price, often sits with whoever negotiated it, far from accounts payable, the team that pays suppliers. Checking every line against it takes time a small finance team rarely has, so invoices are approved on trust, and the price check that the procure-to-pay process puts at invoice matching is skipped.

An external auditor will not necessarily catch it either, because the PCAOB’s standard on audit evidence, AS 1105, describes audit sampling as testing less than 100 percent of the items in a balance, and an audit’s aim is an opinion on whether the statements are fairly presented overall. A clean audit opinion does not say every supplier billed the agreed price.

What should you check on every invoice?

Check each invoice against its agreement in six places, and record the result of every check, whether it matched or not.

• Price: each unit price matches the agreement’s price for that item on that date, including any amendment, a signed change that moves the price from a stated date.
• Fees: every extra charge, such as freight or a surcharge, is one the agreement or a valid price notice permits.
• Quantity: the number billed matches what was ordered or received, whichever your company goes by.
• Arithmetic: the lines, the subtotal, any credit and the total add up from the price and the quantity.
• Credits: deposits and earlier payments the agreement calls for are taken off the final invoice.
• Duplicates: no invoice repeats one already paid, under the same number or a different one.

Start with the suppliers you pay most often under a written agreement with prices in it, because a small error repeated on every invoice adds up fastest there. For each one, find the agreement and any amendment, take the three most recent invoices, and work down the list. A gap on one invoice usually means the same gap on every invoice since the price last changed.

Worked example: copper pipe at Ferrygate

Ferrygate Plumbing & Heating is an invented company, one of the Demo companies Ressura uses to show its checks, and every figure below is made up for the example. It is a plumbing and heating contractor that buys copper pipe from Cascade Pipe & Supply under a supply agreement.

The agreement sets $38.60 for a ten-foot length of three-quarter-inch copper pipe, and Ferrygate ordered 150 lengths for a residential installation. Cascade’s invoice billed 180 lengths at $41.25 each, $7,425.00 for the line.

Two separate checks fail on that one line: the price is $2.65 a length above the agreement, with no amendment or price notice that moves it, and the quantity is 30 lengths more than the order. What Ferrygate owed for the line was 150 lengths at $38.60, which is $5,790.00. The invoice asks $1,635.00 more: $397.50 from the higher price on the 150 lengths ordered, and $1,237.50 for 30 lengths nobody ordered.

The same invoice billed solder at $7.80 a roll where the agreement sets $8.20, on 20 rolls. That is $8.00 billed under the agreed price. It is worth knowing, because it may be an error the supplier corrects later, but it is a separate figure: it is never subtracted from the $1,635.00, since the supplier still owes the credit for the copper in full. Ferrygate reports it as “Overcharged $1,635.00 · Billed under the agreed price $8.00.”

Copper is a line Ferrygate buys every month. If the price had been wrong since the start of the year and nobody checked, the same $2.65 a length on 150 lengths a month would have cost $397.50 a month, or $4,770.00 over a year, before any extra quantities.

What do you do if you find an overcharge?

You send the supplier the agreement, the invoice and the difference, and ask for a credit note, a document that reduces what you owe on the next invoice. Do it within the dispute window, the number of days the agreement gives you to challenge an invoice, because a supplier can refuse a claim made after it closes. A clear, documented gap is the easiest kind of claim for a supplier to accept. Then check the next invoice from that supplier, to confirm the corrected price has actually been applied.

Checking before payment makes this considerably easier, because a gap discovered before you pay is corrected with one email and a revised invoice, instead of a request for money back.

What does a clean result look like?

A clean result names what was checked, against which agreements, and says nothing differs from what was agreed. It might read “47 invoices checked against 6 agreements, all in order,” with each invoice, its agreement and the prices compared listed beneath it. It should also say plainly what could not be checked, such as an unreadable file or a line with no matching price, because a clean result is only worth what it actually covered.

If you are the bookkeeper or work in accounts payable, that record is how you show everything is in order. A result with nothing to chase is not an empty result: it means your process works. Take one sentence your manager can repeat: “Nobody is overcharging us: 47 invoices checked against 6 agreements, all in order.” If a check found a gap, the same sentence names the dollars and the supplier, such as “$1,635.00 found on one Cascade invoice, raised for a credit note.” Either way, the line reports a result, and both results are good news for the company.

How often should you check?

Check every invoice as it arrives and before it is paid, so the record accumulates with your payments instead of being reconstructed at year end. Checking every invoice, rather than a sample, is what lets you say nobody is overcharging the company, rather than that the invoices you looked at were fine. It also keeps you inside each dispute window, and it means the evidence an auditor or a lender asks for already exists.

How can you find out in minutes?

Add one agreement and one invoice billed against it to Ressura’s Procure-to-Pay Module, which is free to start with nothing to connect. It checks each unit price against the agreement on the invoice date, applies amendments and price notices from their dates, matches every fee to one the agreement allows, holds quantities against your orders or receipts, adds every invoice up again and flags duplicates. Any overcharge is shown in dollars with the arithmetic beside it, so you can check the figure yourself, and a line billed under the agreed price is shown as its own figure. If nothing differs, the result reads All in order and lists exactly what was checked, and if a file could not be read, it says which one. For a step-by-step look at the price comparison itself, see checking supplier invoices against agreed prices.

Sources

1. audit evidence, AS 1105