Topics: Invoice audit, Freight Audit & Payment, Freight Contracts, Transportation Spend Management
With contract season right around the corner, it's a great time to start talking about one of my favorite topics: freight contracts. I know that makes me unique, but I don't think I'm alone in appreciating dotted i's and crossed t's. In my area of overseeing the invoice audit function at Cass, we see a lot of details that get overlooked in contracts, ones that matter when the invoices come in.
A good audit saves you money and time, and for you to maximize both of those, every detail that shows up on a bill needs to be auditable. Invoice audit solutions can handle business rules galore to ensure invoices are paid correctly. But when information on the invoice doesn’t tie back to the agreement, any audit solution—unless instructed to ignore that detail—will kick out the invoice as an exception. And exception invoices, we all know, are the enemy.
The thing is, exceptions often fall into categories that are completely preventable by improving the “auditability” of the freight contract. Spellcheck may not like it, but “auditability” refers to using black-and-white terminology and specifying exactly where external information can be found.
Achieve an Auditable Contract with These 10 Tips
Processing 36 million invoices per year, which are based on thousands of contracts, we see many common audit issues across our shipper clients - issues that can be traced back to unclear contract language. You can set up your invoice audits for higher throughput and fewer problems by making simple improvements.
These ten tips will seem obvious when you read them, but we’ve all pushed on a door that says pull at some point in our lives.
1. Specify the effective date
Believe it or not, the contract effective date—the date that a rate begins—is among the most commonly missed pieces of information in a freight contract. The effective date must be included in the freight contract so the rating engine and audit rules can switch over at the intended time.
2. Define all accessorials
It’s essential to define all possible accessorials—those that are commonly used and those that aren’t planned to be used in the foreseeable future. While this may seem overly thorough, it’s necessary to cover the cases that could arise from unforeseen circumstances. For example, if weather or construction dictates a driver takes a different route, the rate for out-of-route miles is used. When an accessorial like out-of-route miles is not specified in the contract, it is left to the carrier to determine based on their rules tariff. In other words, you’ll be paying list price.
3. Provide detailed location information
Shippers should ensure all contract components related to locations are well-defined. For example, origins and destinations are always easiest to audit when zip and country codes are used. These are black and white. A destination of the “Chicago Area” is tough to audit. A rate that applies to all the zip codes in the Chicago area – easy.
For less-than-truckload (LTL), the shipment may go to a destination terminal (where the terminal makes the last leg of the delivery). When billed, each of these invoices would show the surrounding cities and zip codes where the deliveries were made, but each rate is based on the destination terminal. From an outside perspective, this is a challenge to audit without knowing how the destinations may appear differently on the invoices. This is especially common for LTL shipping from the U.S. to Canada.
4. Define shipping zones
Contracts with rates based on shipping zones must clearly define the zones. If the invoice says “Memphis,” does the audit system know what zone Memphis is in? A zone map will show whether the destination is in Zone 1, 2, or 3, etc., and this information can be used to look up the rate in the contract. A conversion table helps translate the city, state, or zip code into the corresponding shipping zone.
5. Define all terminology
Disconnects between contract terminology and invoice descriptions can trip up an audit if not accounted for.
A service level, for example, may be “Service Level 1” in the contract but “Next Day Service” in the carrier’s documentation. The carrier is often unable to change the way it is shown on the invoice due to its own billing system limitations, even though the contract states service levels a particular way. Shippers should send templates to whoever is managing their invoices and audit rules to align the two parties’ terminology.
International freight contracts tend to have these discrepancies with handling charges. Does the “handling charge” on the invoice refer to a handling charge at the port, origin terminal, or destination terminal? If it is for origin handling, it might be called that or “origin terminal handling.” Unless specified, it is difficult to know whether these are different ways to refer to the same thing or are entirely different.
6. Provide fuel surcharge schedules
Some shippers negotiate with their carriers to use a fuel schedule they prefer, and others use a fuel schedule from the carrier. Always specify the fuel schedule and exactly where to find it. In either case, the freight rating system needs this schedule to find the applicable percentage of the linehaul or per-mile rate for calculating the fuel surcharge.
The other element necessary to audit fuel surcharges is the effective date. The U.S. Energy Information Administration (EIA), under the DOE, updates the national average price for diesel fuel every Monday. If your contracts refer to a source like this, they must specify exactly when that new price is used. For example, does the Monday price go into effect on Tuesday? Is this the immediate day following Monday, or the following Tuesday? The exact effective date must be stated to avoid different interpretations by the carrier and clarifying questions from your audit provider.
7. Cover the full scope of your business
We know you hire a carrier for specific lanes, which are the focus of the contract and rate negotiations. However, chances are, you’ll use that carrier for another lane at some point - so it doesn’t hurt to be ready by having rates in place beforehand. If you don’t, invoices for those shipments may be held up, and the rates you pay will be list price. A good practice is for your backup rates, the ones you don’t expect to use, to be state-to-state.
8. Specify the mileage source
While there are several ways to calculate mileage—like choosing the shortest or most practical route—route optimization adds another layer to this. For instance, a carrier may find that a longer route is faster due to real-time factors such as traffic, construction, or weather. Bridges, tunnels, and local regulations also limit routes for 48' and 53' trailers.
A rating engine calculates the expected cost of a shipment based on a shipment file that includes origin and destination. If there is a difference between the estimated and billed charges—due to a difference in the calculated mileage—this can create issues when auditing.
Any rating engine should be able to get routes from the leading mileage sources – PCMiler and Milemaker – without a problem.
9. Use the same rates for similar shipment profiles
Let’s say you ship surgical devices and medical supplies from the same facility, but those products are sold by different business units within the company. You’ll reduce the chance of invoice mistakes and confusion by having the same rates for the same carriers and services out of that facility. A division name could be left off an invoice or a carrier could reference the wrong division, leading to higher rates than expected. Aligning similar shipment profiles helps simplify how rates are determined, and this consistency ultimately reduces errors.
If you must negotiate different rates per division, all rate files must clearly label the division. However, it's still possible for an issue to occur based on carrier confusion and mistakes.
10. Specify if pallet weight is included
For LTL freight shipped on a pallet, whether to include the pallet weight in the total weight must be stated in the contract. Pallets can weigh as little as a few pounds and as much as fifty pounds. When you multiply this across many shipments, it makes a significant difference. If this is not clarified in the contract, it’s left open to interpretation – by the carrier.
Making Invoices More Audit-Friendly
The bottom line is simple: before you sign a new freight contract, review it for ambiguity with a fine-tooth comb. Missing and vague details–anything that’s not black and white–will cause problems downstream. As you continue your quest for maximum efficiency and on-time carrier payments, ensuring auditable contracts is one of the simpler routes to success.
