Discretionary audit clauses

A discretionary audit clause is a contract provision that lets the Government of Canada check, at its own discretion, what a supplier has certified about its pricing. The Government of Canada's Supply Manual glossary defines the audit as verification of the profit on a contract or series of contracts, or verification that Canada is not being charged more than the contractor's lowest price charged to anyone else. The French term is vérification discrétionnaire des comptes.

The clause is used on negotiated firm-price contracts, where it works alongside a price certification signed by the supplier. The certification states the facts, and the clause gives Canada the right to test them. The glossary entry is published on CanadaBuys.

What a discretionary audit checks

The audit covers two specific questions. The first is profit: whether the profit the contractor earned on a contract, or on a series of contracts, is what the contractor certified. The second is price comparison: whether Canada paid more than the lowest price the contractor charged any other customer for the same goods or services.

Because the audit is discretionary, Canada decides whether and when to carry it out. A supplier should treat the right as always open once the clause is in the contract.

Clause numbers and the $50,000 threshold

Public Services and Procurement Canada (PSPC) buyer guidance sets the rule for non-competitive procurements. When a non-competitive procurement results in a firm-price contract over $50,000, the offeror must provide the appropriate price certification. The solicitation and the contract must then include the appropriate discretionary audit clause. The rule is set out in the CanadaBuys buyer's guide on audit clauses.

The CanadaBuys Practitioner's Guide for Procurement Pricing names the Standard Acquisition Clauses and Conditions (SACC) clauses C0100C, C0101C and C0102C as the discretionary audit clauses used with a firm-price basis of payment.

How it differs from other audit clauses

The discretionary audit clause is not the same as the general audit clause. PSPC instructs buyers to include the general audit clause in every contract. It applies broadly to contract records and to estimated and actual costs. The discretionary clause is narrower and targets certified profit and price-comparison information on negotiated firm-price work.

Contracts with cost-reimbursable elements carry a further requirement. Buyers must include the appropriate audit clause for that work in the solicitation documents. The Office of the Procurement Ombudsman reports that federal organizations use standard audit provisions, particularly on cost-reimbursable contracts, and that contracts can require audits during a specified period while suppliers keep their supporting records. See the Ombudsman's report.

A PSPC directive for non-commercial goods and/or services shows the consequence. The estimated profit in a price or rate certification is subject to audit before or after payment. If the audit finds that actual profit is not reasonable and justifiable, the contractor must repay the excess.

A separate use of the phrase in Indigenous procurement

The phrase also appears in the Procurement Strategy for Indigenous Business (PSIB). Indigenous Services Canada describes a discretionary audit there as a compliance audit that may be conducted to verify continuing 51% Indigenous ownership and control, or Indigenous-content requirements, when an ongoing or past PSIB contract is in question. This is a different audit with a different purpose. See Indigenous Services Canada.

What it means for a supplier bidding on Canadian contracts

If you negotiate a firm-price contract with PSPC, expect to sign a price certification and accept a discretionary audit clause. Certify only figures you can support. Keep the records behind your profit and your prices to other customers, and keep them for the period the contract specifies. An audit can happen before or after payment, and a finding of unreasonable profit leads to repayment of the excess. Check the solicitation for SACC C0100C, C0101C or C0102C so you know which version applies. If you hold a PSIB contract, be ready to evidence your Indigenous ownership, control and content on request.