5 Audit Traps in Steel Manufacturing and How to Avoid Them

The United States steel industry is massive and steel manufacturing remains a major industry. 

The estimated revenue is just below $140 billion, and more than 80,000 people are employed in the industry. The top companies generate between 40% and 70% of industry revenue. 

What do they all have in common? Not only do they want to improve productivity and protect their budgets, they also don’t want to get caught up in a common audit trap, such as overpaying for contract labor.  

Here are five warning signs a steel company should look out for to determine whether it is at risk of overpayment and how to address those warning signs. We also review how myTrack by Management Controls (MCi) can help.

5 Common Warning Signs for Avoiding Overpayments 

1. Vagueness in terms and conditions of executed vendor contracts and use of expired agreements and rate sheets. 

The procurement team goes to great lengths to develop contracts. Yet, because they’re in the back office, they don’t necessarily consider how the terms and conditions apply in the field, where reality is different. 

In addition, contracts rarely cover all the scenarios that could potentially happen in the field. When undefined conditions arise, an assumption must be made. The vendor, naturally, puts a definition behind the undefined condition that benefits them. 

For example, consider a vendor contracted to install a new conveyor system in a steel manufacturing plant. The vendor purchases steel beams and welding equipment necessary for the installation. The contract doesn't stipulate whether the vendor can bill for small tools and equipment valued under $2,500, such as welding torches and grinders. This ambiguity can lead to disputes: the vendor might bill for these tools as additional costs, even though they will retain and use the tools for future projects. Without clear terms in the contract, the vendor may interpret the situation in their favor, leading to potential overbilling. 

One might think that the equipment was purchased as part of the job. Therefore, the vendor should be able to bill for that. On the other hand, the vendor retains the tools and can use them for future jobs, which will help them increase their margin.  

So, who should pay for those tools? If the contract doesn’t account for this scenario, the vendor decides how to handle the situation. When interpretation must occur, it will go in the vendor's favor with a contractor-driven process. 

Therefore, when contract terms and conditions are undefined or vague, steel companies expose themselves to overbilling.  

How myTrack helps: The software forces owners to have terms and conditions. Removing contract vagueness saves the owners money, often leading to a better work environment. People know exactly what to expect, which minimizes potential payment disputes. 

2. There is a lack of vendor invoice verification for labor charges, including hours worked in the plant and offsite, overtime approval, and rates applied. 

Vague terms and conditions typically lead to vendors submitting unclear invoices that lack sufficient detail to validate the charges, even though owners require this.  

They want backup documentation or validation with the vendor invoice to substantiate the charges on the invoice. 

Take work schedules as an example. A welding contractor charges the steel company eight hours of straight time for a laborer. The only information on the timesheet is the employee's name and eight hours written under the straight time column, accompanied by a supervisor's signature. 

Some may claim this invoice is transparent. But does it prove to the owner that the employee was working when they claimed to be? It lacks sufficient information to be verified.  

How myTrack helps: An invoice that lacks details is unacceptable in myTrack. Details such as the work date and what gate the employee badged in and out of are required. With this proof of presence, the owner knows the employee was on-site during the scheduled time. The access control system or gate system validates the timesheet rather than simply taking the contractor’s word. 

Again, myTrack also helps improve the relationship between the owner and vendor by eliminating the emotion from validation. 

3. Absence of oversight of work being performed and incomplete or inaccurate time sheets submitted by vendors. 

A poor process makes validation irrelevant. When too many departments are involved in work validation, they typically look at who authorized the document before them rather than the data.  

The first maintenance person in the validation process focuses on whether the work was done, such as repairing the refractory linings in the furnaces and kilns, and whether it was a quality repair. 

Accounts payable (AP) is concerned about the length of the repair. What is the pay type for the repair person? The first person is not concerned about this. If AP sees the signature of the first person and accepts the paystub based on this, this is an issue since the two people are not on the same page (looking at different outcomes). It results in a lack of oversight and no confirmation regarding the hours worked by the repair person.  

Therefore, when the process is out of sequence (the timesheet goes from person one to AP), the source of truth becomes the timesheet, which may not accurately account for the amount the owner needs to pay. 

How myTrack helps: When myTrack is part of the process, the timesheets go to AP and include the name of the repair person, the day they worked, the day, the time they badged in, the time they badged out, the total hours on site and the rate of pay. The software, rather than a person, validates the information. 

The software calculated the vendor’s earnings and validated that they earned it. In this scenario, AP has little to do in terms of validation. 

4. Vagueness in the scope of work identified on purchase orders.   

The fourth warning sign is also about vagueness. A vague scope of work means granularity and transparency are lacking regarding how much funds were used and for what purpose. The purchase order (PO) has little meaning.  

Steel plant owners may struggle to identify: 

• Where did I incur this cost?  
• Why did I incur this cost?  
• Where did the money go?  
• Who spent it?  
• Who wrote the check?  
• Who did we pay it to? 

The lack of transparency hinders decision-making. Owners cannot make effective and timely decisions without clarity on their costs. Perhaps, a piece of equipment, like a hydraulic pump, should be replaced rather than fixed.  A vendor's costs may be excessive and using a competitor would make sense. Effective and timely decisions are nearly impossible when purchase orders have a vague scope of work. 

How myTrack helps: With myTrack, there is no longer a large and unruly PO bucket that lacks details. The software provides owners with the specifics. It gives them: 

• Transparency – Owners know how much money has been spent. 
• Granularity – Owners can determine where the money came from and who spent it. 
• Visibility – Owners know who received the money and for what 
• Velocity – Owners get information in real-time (rather than at the end of the week or project).

These details give owners the information they need to make decisions quickly and confidently. 

5. Lack of vendor invoice verification for equipment and material charges and charges for items considered to be included in overhead. 

Labor is a major cost for owners. Therefore, processes typically focus on labor rather than ancillary charges, such as equipment and materials. However, ignoring these charges results in a risk of overpayment. Healthy contractor management processes focus on holistic contractor spending. 

Managing ancillary spending is more challenging (than labor) since there’s less data, i.e., nothing exists like the data that can be gained by focusing on the gate activity. 

It takes more effort to monitor these costs. For example, invoices must be scanned, uploaded, and reviewed to determine whether they include non-billable items. 

Then, there are equipment costs, such as specialized equipment for cutting steel components. Contracts typically include rate structures for contractor-owned equipment. When the contractors use their equipment, they tell the owner how much they owe. The price is commonly based on the daily rate. 

Yet, based on the contract stipulations, the fee should be based on the (lower) weekly or monthly rate. When the vendor is uncertain (back to vagueness), they charge a higher rate. If the details are not clearly stated, or if invoices are not verified, these costs are rarely identified, and owners pay the invoice. 

How myTrack helps: The software verifies all costs, not just labor. It ensures equipment, material, and other costs are paid per the contract. It flags issues so owners can engage the vendor and review invoice charges. 

Take the Next Step with myTrack 

No company wants to wait until an internal audit uncovers a lack of oversight or erroneous invoicing. myTrack—the next-generation Track Platform—helps companies of all sizes gain better visibility, control, and productivity from their workforce. 

In fact, steel companies that deploy myTrack can see savings of up to 10%-15% on labor costs alone. Read the case study to learn how myTrack can help your company reduce labor costs.