Invoice to Contract Validation: Part 1 - Getting Started

The main objective of this post is to get a basic understanding of what it is, why you want to pursue this business practice, which are the different subcomponents that go into a successful invoice to contract validation program and "how" to accomplish this for your organisation.

Subsequent blog posts will go deeper into these different subcomponents so that you get both the "big picture" as well as the necessary detail.

What is invoice to contract validation?

Generally business transactions begin with an agreement in the form of a contract, order form or purchase order. This is often followed by one of the parties delivering the goods or services as agreed upon and sending an invoice to receive a payment.

For the payer this moment results in an important question: Is this invoice valid, so that I can proceed to make the payment? Now partly this question is answered by tax and compliance questions such as whether the invoice meets the regulatory tax requirements, but the other critical part is whether the amount stated on the invoice correctly matches what has been agreed upon.

This article will focus on the latter, which is essentially comparing the invoice against what has been agreed upon in the contract. We take the perspective of the payer (typically the customer or lead in a partnership relation), but can for the most part be relevant to the payee as well. There are some subtle differences since in that scenario you will be the sender of the invoice and receiver of the payment, thus needing to ensure your issued invoice matches the contract and the payment matches the issued invoice.

Why invoice to contract validation?

Research from World Commerce & Contracting (WorldCC) shows that commercial and contracting issues lie at 70-75% of failing projects, resulting in an average of 9.2% of annual revenue leakage.

Part of this leakage is caused by over-billing / over-payments which is generally estimated at around 2% of total expenses on average. Depending on the size of your total expenses you may be able to add up to 2% to your bottom line through effective invoice validation.

The contract

Wikipedia defines a "contract" as "a legally binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement". Historically (and in some cases even today) a contract was a pack of paper with wet signatures from participating parties.

Unfortunately, while many business processes and practices have been modernized and digitized, contracts are still typically a "file", whether it's PDF, Word or Google Doc. This means that if you're lucky you can access the whole document but you may not have access to the exact relevant clauses and parameters that you need in order to achieve a successful implementation of invoice to contract validation.

Canveo enables companies to retrieve the necessary data points from their contracts into their downstream systems and business processes.

The invoice

The invoice is what will be sent to you by the payee and is generated by their system. The invoice may knowingly or unknowingly be generated without taking consideration of the contractual agreements.

Invoices come in all shapes and sizes, most of the time they are no longer in paper format, but similarly to contracts they are still frequently in "PDF" which essentially is not a whole lot better for automation purposes and downstream usage of the invoice data. For the invoice to contract validation to work effectively, the invoice needs to be itemized and digitized, which is generally also a requirement for accounting / books & records purposes. Once you have captured the invoice line item information, you can start the matching process against the contract.

The matching

With a digitized contract and a digitized invoice, you can setup the logic to match appropriate invoice lines, quantities, prices, discounts, rebates, etcetera against the contractual clauses and parameters.

The matching logic can get complex relatively quickly, but this is also a good example where the Pareto Principle (ie. 80/20 rule) applies.

Probably the hardest part of the matching is to know which invoice line should be matched against which contractual clause, milestone or parameter. You will need to capture the counterparty on both the invoice and the contract, and ensure they are aligned. Next you will need to be able to match the invoice line item against the specified contract that applies for this transaction, often order forms or purchase orders can help in this regard.

Capturing value

After you completed the matching of the invoice vs. the applicable contractual agreements you may find one or multiple mismatches, some of which can be considered actual "issues". The question that immediately comes up is: what to do now?

The answer is multifaceted and will depend on the context, business relationship, size of the mismatch, and various other factors.

You could opt to not make the payment until you obtain a correct invoice that meets the contract. This might not always be the approach you want to take and human judgement will be required, potentially driven by on supplier risk and/or amount thresholds.

Conclusion

Invoice to contract validation is a simple concept but highly complex to implement successfully at scale. Invoices and Contracts can both be ranging from a few to tens, hundreds or even thousands of pages. Matching line-by-line can be unrealistic if you try to do this manually.

Therefore, it is critical to obtain digitized records of both the invoice and contract. While many Procure-to-Pay ("P2P") systems exist that help digitizing the invoice, Canveo is a unique platform that digitizes the contract and treats it not like a "file" but like a collection of clauses and parameters which you can leverage in downstream processes.

Stay tuned for our upcoming articles on Invoice to contract validation or contact us if you like to learn more.