Review Contractor Invoices for Common Overbilling Errors
Sometimes contractors accidentally overbill you. Less frequently, but still too often, they may even try to cheat you. Being the victim of overbilling practices not only costs you lots of money, it can also lead to audit problems. Auditors pore over contractor invoices to make sure they back up the amounts you charge to the site operating account. If the auditors believe the charges aren’t reasonable, necessary, or properly supported, HUD could order you to reimburse the site for any charges it doesn’t accept.
To avoid unknowingly paying more for items and services than the amounts you thought you negotiated, or paying for items or services you didn’t order, look closely at contractor invoices. By correcting invoice errors, you can save a lot of money. We’ll tell you how to spot and correct overbilling errors to avoid paying too much for contractors’ services and possibly facing audit troubles as well.
Require Cost Breakdowns and Documentation
Before we detail the common invoice errors, your site should have proper procedures in place, such as requiring a cost breakdown for contracting jobs before executing a contract. "In fact, all work should be covered by a contract that spells out the details of the work to be done, the time frame in which it is to be completed, and the specific cost," says Mark Chrzanowski, compliance specialist at Gene B. Glick Management Co.
These cost breakdowns memorialized within a contract provide the boundaries or basis for evaluating contractor invoices. The cost breakdown requirement applies even when executing a contract change order that’s outside the scope of the original contract.
For example, one Kansas City owner executed a contract change order without requiring contractors to provide the required cost breakdown of the proposals or completing the independent cost estimate before reviewing proposals. It had originally entered into a contract to replace 47 heating, ventilation, and air conditioning (HVAC) and hot water heater units in March of 2010. The change order was executed to wrap existing duct work with insulation to eliminate condensation damage to the ceiling and light fixtures. The original contract required only the new HVAC units to be attached to the existing duct work and didn’t require replacement or improvement of duct work.
HUD Handbook 2210.18, paragraph 1.2(B)(4), states that modifications that change the scope of work beyond the original contract must be justified as noncompetitive or procured competitively. The owner didn’t justify the change order services as noncompetitive or procure the services competitively. The owner also didn’t require contractors to provide the required cost breakdown of the proposals submitted for the change order services. HUD Handbook 2210.18, paragraph 1.2(B)(4), also states that the owner must request a cost breakdown of the proposed cost.
Further, Form HUD-5370 states that contractors must break down proposals into direct costs, indirect costs, and profit. As a result, the owner couldn’t support the more than $10,000 in contractor and subcontractor fees charged for administering the change order services [HUD Audit 2012-KC-1004].
In another audit, a Virginia owner was ordered to reimburse the site for unsupported contractor charges. The auditors found many instances of unreasonable or unsupported charges for amounts paid to maintenance contractors. For example, the site paid for work identified in its records as “siding,” but had no bill showing the costs for labor and materials. The site paid other contractors for “labor and materials” without getting a bill that described the work the contractors did. And the site paid one contractor after he simply gave staffers an envelope stuffed with hardware store bills to justify the amount he asked for. The auditors required the owner to reimburse the site operating account for over $96,000 in unsupported charges [HUD Audit Rept. 96-PH-212-1017].
16 COMMON INVOICE ERRORS
Here are 16 common invoice errors that can result in overbilling and attract the probing eyes of HUD auditors, along with suggestions from our experts on how to solve them.
1. Work Only Vaguely Described
A contractor may send you an invoice with only a vague description of the work done. If you don’t know exactly what work was done, you won’t know if you’re being billed for the service you requested. You could be billed for work that you didn’t order, that isn’t your responsibility, or that wasn’t done.
Solution. If you get a vague invoice, ask the contractor for another one that describes in detail the work that was done. The word “miscellaneous” on an invoice is a red flag, and you should find out exactly what services and costs it includes. Be sure to compare the invoice to the cost breakdowns for the project in the contract. The contract should specify the breakdown of expense items by category and item names that must be used for invoicing, adds management consultant Doug Chasick, Chief Learning Officer at LeaseHawk.
2. Work Not Authorized
Sometimes a contractor will bill you for work you didn’t authorize it to do. The contractor may have gotten the go-ahead from one of your employees, even though the employee wasn’t authorized to give it. Or a resident may ask the contractor to do work and try to bill it to you.
Solution. If you’re being billed for unauthorized work, ask the contractor for the name of the person who authorized it. Chrzanowski recommends adopting a multi-level approval process to help ensure consistent decisions and proper communications among all involved parties. For example, an owner might name a single representative to deal with contractor questions or issues as they arise, such as additional required work. And this person may be the same individual or different from the person responsible for supervising the work for the owner. The job supervisor would communicate with the contractors to ensure that they understand the owner’s expectations.
If one of your employees authorized the work, instruct the employee not to authorize work again without permission from the designated supervisor. If a resident authorized the work, tell the contractor that the resident had no right to authorize the work or to bill it to you.
The best solution is to add a list or addendum to the contract that lists the specific designated people who may authorize additional work or change orders and what their spending authorization limits are. Also, the addendum should include a specific list of work that needs to be done along with "not to exceed" amounts for certain items that can’t be forecast to the penny, says Chasick.
3. Services Not Provided
A contractor may bill you for work or items it didn’t actually provide.
Solution. If you get an invoice for work you don’t remember being done, check to see if it was actually done. If you’re unable to check on it yourself, ask the contractor about the work in question. This way, you put the contractor on notice that you’re inspecting invoices closely and that you won’t accept any padding.
Be sure to document any disputed work. Chasick recommends taking photographs of incomplete jobs, sub-standard work, projects not authorized, or incorrect parts.
Example: A landscaper bills you for digging an irrigation ditch on your lawn, but you don’t recall having such work done. You go to the lawn and find no irrigation ditch. If you bring this discrepancy to the contractor’s attention, it will probably correct the invoice and reduce your bill.
4. Work Not “Necessary”
Some contracts give your contractor the right to perform tasks and charge them to you when certain conditions are found or when work is “necessary.” For example, you may have contracted with a snow removal contractor to remove snow and bill the owner when at least an inch of snow had accumulated on the ground. But the contractor may have billed for snow removal when only half an inch of snow fell.
Solution. Check your contract to see how “necessary” work is defined and whether you think the work billed on your invoice meets that definition. If it doesn’t, tell the contractor that you refuse to pay for it. It’s smart to include a clause in your contracts saying that contractors must get your written permission to perform necessary work or work that hinges on certain conditions.
5. Hours Worked and Number of Workers Not Specified
Sometimes a contractor will bill you for labor costs at an hourly rate, and either charge you for more hours than it actually worked or for more employees per hour than actually worked on the job.
Solution. If the number of hours you’re being charged for isn’t specified in the invoice, ask the contractor for this information. Then ask the contractor how many people worked on the project. If either number seems too high, ask the contractor to explain. If you still have doubts about the number of people who actually worked on the project, ask your employees if they can recall how many of the contractor’s workers were on the job and when.
6. Labor Rate Incorrect
Sometimes a contractor will bill you for labor at a rate that’s higher than the contract rate.
Solution. If a billing rate seems incorrect, check to see whether it matches the rate set in your contract. If the contractor gets paid by the hour, your contract should always set out the exact rate you’ll pay the contractor.
7. Subcontractors Not Used
Sometimes a contractor will charge you for the use of a subcontractor when no subcontractor was actually used.
Solution. If you suspect that no subcontractor was used on the job, ask the contractor for the name and phone number of the subcontractor and call to find out whether it did any work.
8. Personnel Not Essential
Sometimes a contractor will bill you for the time of nonessential personnel or trainees. As a rule, you shouldn’t pay to train new employees, and you certainly shouldn’t pay for the time of employees who don’t work.
Solution. If you get a bill and the labor portion seems too high, ask the contractor exactly who was working on the project and in what capacity. If the contractor says that a trainee was used, tell the contractor you don’t want the trainee’s time to be billed at the full rate. Try to find out whether everyone on the job was actually working. Check with your employees to see if they noticed how many of the contractor’s workers were actually working at the job site.
9. Hours Improperly Rounded Up
Sometimes contractors who are paid by the hour round up to the nearest hour, even if your contract with them requires them to bill you to the nearest 10- or 15-minute increment. If this happens once or twice, it won’t cost you too much, but the costs will add up if you get a lot of bills that are rounded up to the nearest hour.
Solution. If you’re being routinely billed for full hours of work and your contract doesn’t permit rounding up, ask the contractor to explain. If the contractor admits to rounding up, negotiate a reduction in your bill and tell the contractor you’ll no longer accept rounding up. If the contractor denies rounding up, put the contractor on notice that you’ll be examining the invoices closely and monitoring the work time yourself.
10. Travel Time Overbilled
Sometimes contractors overbill you for travel time. The amount of travel time may be excessive or rounded up to the nearest hour.
Solution. If a contractor charges you an excessive amount for travel, ask what its travel schedule was. Say that you won’t pay for excessive travel time and that, even if the contract doesn’t say so, you want travel time rounded up to the nearest 10-minute increment, not to the nearest hour. For example, a snow removal contractor may be routinely billing you for an hour of travel time to bring its equipment to the site even though the equipment is being brought from only a quarter mile away.
11. “Past Due” Amounts Paid Up or Nonexistent
A contractor may bill you for amounts “past due” that you either have paid or have never been billed for.
Solution. If you get a bill for an amount past due, check your records to see if you were ever billed for that amount and whether you paid it. If it turns out you have already paid the amount and the check has cleared your account, show the canceled check to the contractor. If you haven’t been billed for that amount, ask the contractor for a copy of the original invoice, which should state what you were billed for.
12. Double-Billing for Items Back Ordered or Work Not Begun
Sometimes a contractor will bill you twice for a back-ordered item—once when it orders the item, and again when it receives the item. A contractor may also try to bill you either for work in progress or work that it hasn’t yet begun, and then bill you again after the work is done.
Solution. If you get a bill for work or items that seem familiar from a previous invoice, check to see whether you have already paid for them. If so, show the contractor the original invoice and the canceled check, if necessary. To avoid this double-billing problem, you should pay for items only after you receive or use them and for work only after it’s actually done.
13. Late Fees Not in Contract
Sometimes a contractor will bill you a late payment fee even if the contract doesn’t authorize late payment fees. It may also try to charge you interest on the overdue amount, or an administrative fee for the cost of billing you twice.
Solution. If you’re charged a late fee or an interest charge, check your contract to see if it allows such fees. If it does, check to see whether you paid within the deadline.
14. Improper Taxes Computed
Sometimes a contractor will charge you for sales taxes that don’t exist, and then simply pocket the extra money.
Solution. Have your accountant double-check that all sales tax computations are legitimate.
15. Substituting Generic or Used Parts
A contractor may bill you for more expensive, brand-name parts but actually substitute generic or used parts.
Solution. Make sure your contract specifies what kinds of parts the contractor will use. Ask the contractor for a copy of the invoice for the product that identifies the product’s brand name. Sometimes a product’s brand name is clearly visible on the product itself.
16. Excessive Billing for Open-Ended Contract Terms
Some contract work has unknown or open-ended elements or responsibilities, such as the precise number of shingles a contractor will need to replace the roofs at your site. These kinds of open-ended contract terms can be an invitation to contractor overbilling.
Solution. To close up these open ends, it’s a good idea to require the contractor to specify “not-to-exceed” amounts or worst-case scenarios and include these amounts in the contract to limit the final tally. This way you won’t end up with outrageously high bills you didn’t anticipate.
Doug Chasick, CPM, CAPS, Adv. RAM: Chief Learning Officer, LeaseHawk, 15211 N. Kierland Blvd., Ste. 300, Scottsdale, Arizona 85254; www.leasehawk.com.
Mark Chrzanowski: Compliance Support Administrator, Gene B. Glick Management Co., 8425 Woodfield Crossing Blvd., Ste. 300W, Indianapolis, IN 46240;www.glickco.com.