Expertise Beyond the Numbers

How to Recognize and Recover Hidden Shipping and Freight Charges in Your Supplier Contracts

Maybe it’s happened to you: your business goes to great pains to identify, vet, and hire an essential new supplier. You draw up an exacting contract that covers all the potential costs, charges, and contingencies. Contract signed, the supply chain improves. And then the first invoice comes in, higher than expected. Sometimes much higher.

In many cases, these unexpected charges are the result of shipping and freight, which isn’t always covered in contracts and often isn’t itemized on invoices. Many businesses expect, and their contract terms often require, that freight and shipping charges be passed through at actual costs with no markup. But it can be difficult or even impossible to validate actual freight and shipping costs using the invoicing information provided by the supplier.

How can you protect yourself against a blindsiding like this, and how can you make sure that you’re getting what you’re paying for? Here are some steps that we’ve seen clients take to ensure both.

  1. Itemize freight and shipping charges. State in your contract that invoices should reflect freight and shipping charges separately, and ensure that the supplier includes a copy of the freight invoice from their carrier, or documentation of actual amount paid to the carrier less discounts or other incentives.
  2. Consider sales tax. In many jurisdictions, freight and shipping charges passed through at actual cost are exempt from sales tax if the charges are itemized separately on the invoice. Understanding the supplier’s invoice is key to determining sales tax accuracy.
  3. Don’t overlook “handling.” In the phrase “shipping and handling,” the latter can cover an awful lot. Many suppliers don’t disclose whether they add internal handling to freight and shipping charges. But handling charges should not be billed unless agreed and specified in the contract pricing terms. For example, handling is not billable if the contract states that freight and shipping are “Prepaid plus Add,” but it could be if the terms are “Prepaid plus Add and Handling.”
  4. Rely on a third-party auditor. Contract terms for freight and shipping are like any other contract term: they’re only as good as an organization’s enforcement. And for all the reasons stated above, they may be even harder to enforce than usual. That’s where a third-party audit can bring clarity. By breaking down invoices, reviewing third-party charges, and comparing costs to contract requirements, auditors can identify significant overcharges and even recover those costs. At SC&H, we have seen auditors recover hundreds of thousands of dollars from single suppliers for non-compliant shipping and freight charges that either weren’t outlined in contracts or were hidden in other ways. It’s expensive to keep your supply chain moving, but an audit can ensure that it’s only as expensive as agreed.

To learn more about uncovering hidden fees or overcharges in your invoices—and how to properly conduct supplier audits—contact us to speak directly with a team member from SC&H Group’s Contract Compliance Audit Services practice.

CPO Supplier and Vendor Audits