Contracted custodial services can represent a large portion of your organization’s budget, with costs running from thousands to millions of dollars. Yet managing contracted custodial service programs and the related controls isn’t typically a core function for organizations, which can lead to costly errors and oversights.

These contracts outline the scope of work, responsibilities, and terms of payment for services such as cleaning, maintenance, and repair of buildings and facilities. Unmonitored, they are subject to common pitfalls including cost overruns, staffing shortages, and a decrease in the quality of service received. Establishing clear expectations and accountability through these contracts is vital to keeping your properties and jobsites well-maintained and meeting health and safety standards.

Contract audits can help you improve accountability and key controls for effective custodial service contracts. By engaging with an experienced custodial services contract auditor and establishing clear audit requirements, you can reduce costs, improve performance, and mitigate risk.

Common Types of Custodial Service Contracts

Fixed Price Contracts. Costs are billed for a specified period (monthly, quarterly, etc.) at a fixed price. These rates are generally broken down by service type, facility location, and unit of measurement (square footage, estimated hours, job title).

Cost-Plus Contracts. Allowable costs are reimbursed by you for the actual cost incurred as evidenced by time sheets, receipts, and invoices, plus a fixed fee or percentage of the costs as profit.

Hybrid Contracts. Combine elements of both fixed price contracts and cost-plus contracts. For example, equipment and supply costs may be billed at a fixed rate while labor costs are based on the actual number of hours worked by the custodian’s staff.

What Are the Basics of a Custodial Services Contract Audit?

Custodial service contract audits are generally conducted to improve operational performance, reduce noncompliant costs, facilitate decision-making, and provide transparency and accountability to key stakeholders. Custodial service contract audit objectives should be clear and concise and address various performance aspects of the program.

Before entering a custodial services contract, you should engage with service providers and auditors early on to establish audit requirements and that a right-to-audit clause is included within the service contract. This can help all parties understand and maintain compliance with the agreed-upon requirements and prevent non-compliant contract audit findings.

Key areas to consider in establishing audit requirements include:

Cost Reductions for Noncompliance with Performance and Reporting Requirements

As fixed price contracts are invoiced on a predetermined schedule with little to no required supporting documentation, it’s essential for you to clearly define cost reductions for failing to meet performance and reporting requirements. This will incentivize contracted custodians to meet these requirements and ensure that you are receiving the quality and level of service you are paying for. For example, a contract clause imposing a 5% cost reduction for any location not meeting its cleaning or reporting requirements, or for custodial staff not completing the stated minimum hours of service, could reduce the likelihood of the contractor not complying with the agreed-upon standards.

Reporting Requirements

It’s important for all parties to understand the contracted reporting requirements, the cadence at which these should be reported, and the common key performance indicators (KPIs) that should be measured to help identify failures, challenges, and mitigate risk.

Consider reporting requirements for the following areas:

• Inspection reports
• Maintenance schedules
• Equipment
• Staffing
• Emergencies
• Security problems
• Payroll requirements

One of the most effective ways to manage custodial service costs is to clearly define allowable and unallowable labor costs. This generally includes determining if labor charges are based on actual wages or predetermined rates as well as defining on-site versus off-site requirements. These procedures can help all parties understand which costs are directly associated with and billed to you, and what rates are compliant with the contract.

Requiring approval from you for excluded labor types and rate adjustments further protects each party from unanticipated costs or audit exposures, helping to prevent cost disputes or overruns.

Consider clarifying the allowability and un-allowability of the following:

• Wages
• Taxes
• Fringe benefits
• Vacation and other paid time off
• Medical benefits
• Life insurance
• Unemployment compensation
• Overtime, double time, premium time, shift pay
• Bonuses and similar incentive compensation (stock options, profit sharing)
• Overhead
• Profit

Additionally, it is common for custodial service contracts to require certified payroll submissions showing classifications, wages, and hours for each individual staffed on the project. Reporting requirements, including the frequency of report submissions and reviews, should be established and monitored for conformance with any contractual requirements.

Equipment Requirements

Maintenance equipment and tool pricing is generally based on prevailing competitive rates for renting similar equipment in the vicinity, or it’s based on third-party retail rental rates and specifications books. Establishing a process for defining any rental cost caps and whether equipment rates are charged hourly, daily, weekly, or monthly will help facilitate productive discussions, as will including any approval requirements from you.

Strong cost-of-work definitions allow you to define adequate allowable and unallowable equipment costs, which helps both parties manage and control cost. Contractual cost-of-work definitions need to be clearly established to enable efficient and effective validation of compliant project charges.

Controlled access and badging data that monitors on-site personnel offers the security advantages of 24-hour monitoring of all individuals on-site and provides you with a backlog of records to support labor costs incurred in the event of an audit. The same can be said of cameras installed to monitor how long equipment is onsite for compared to the costs incurred.

We’re Here to Help

For more information around navigating and auditing custodial service contracts, contact your Moss Adams professional.

Additional Resources

• Real Estate Practice
• Employee Benefit Plan Services