Contract audit

When do we require a contract audit?

As a public authority, we have a duty to ensure that the prices we pay for goods and services are reasonable.

When contracts are the result of a public tender procedure, the competitive procedure and the market will generally help ensure a market price. Competition between several suppliers means that the price is set on ordinary market terms.

In some cases, only one supplier can meet the Danish Defence’s needs. In addition, the defence sector often lacks a directly comparable market that could serve as a basis for benchmarking.

In these situations, we have no market price to compare the offer against. A different method is therefore needed to assess whether the price is reasonable.

How do we assess the price?

When no competition-based market price exists, we apply a cost-based assessment.

This means that the price is assessed on the basis of:

• your documented costs* of carrying out the delivery, and 
• an assessment of what constitutes a reasonable contract-specific profit margin.

In order to carry out this assessment, it is necessary to gain insight into your price calculation and the costs included in the pricing.

How is a reasonable profit margin determined?

The cap of the profit margin for a contract is always determined specifically on the basis of the circumstances of the individual case, including an overall assessment of the documented risk that you, as the supplier, assume in connection with the contract. A high level of risk can typically justify a higher margin.

Confidentiality and handling of information

Contract audits rely to a large extent on your internal and confidential information.

For this reason, only our contract auditors have access to the detailed data included in the audit. The information is not shared with other parts of the organisation or with external parties (with the exception of the Danish National Audit Office (Rigsrevisionen)).

Only relevant parties, such as the contract manager, will receive the audit report, which contains the overall conclusions of the audit and does not include confidential financial figures.

The legal basis for contract audits

As a public authority, we are subject to the administrative-law principle of sound management of public funds. This principle means that, when entering into contracts, we must ensure that reasonable and sound terms are achieved, including that no more than necessary is paid for the delivery in question.

When there is no competition for a delivery, a profit margin helps ensure compliance with this principle, as its very purpose is to ensure that we do not pay a disproportionately high price for the delivery.

The requirements as to which costs may be included in the cost base, and the maximum margin you as a supplier can achieve, also help ensure compliance with the EU prohibition on state aid, as the regulation is intended to ensure that suppliers do not obtain an economic advantage beyond what corresponds to a reasonable market profit. 

* This includes both directly attributable costs and indirectly attributable costs that cover a fair share of the company’s capacity costs.