Overcharges, unclaimed rebates and credits, index cuts never applied, early payment and off-contract buying, each priced against the contract's own terms.
Contract value leakage is the money a signed contract entitles you to and you do not receive: overcharges against the contract price, rebates and credits earned but not claimed, index reductions not applied, early payment and off-contract buying. Audited line by line on an illustrative year of 5,450,000 of spend, it comes to 241,840, or 4.44 per cent, of which 178,700 can still be claimed from the supplier and 63,140 can only be stopped.
Worked in full in Contract Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Leakage is usually quoted as a percentage from a survey and then forgotten. It is more useful as a calculation, because each line of it has a different cause, a different owner and a different remedy. A rebate nobody claimed is a finance process failure; an index reduction never applied is a contract management failure; off-contract buying is a compliance failure. Added together they say how much of the negotiated value the business actually captured.
| Term or fact | Value |
|---|---|
| Invoiced spend on contract | 4,800,000 |
| Invoice lines tested / above contract price | 5,200 / 338 (6.5%) |
| Units overcharged, average overcharge per unit | 18,000 at 2.40 |
| Retroactive volume rebate above 4,500,000 | 1.5% of all spend |
| Liquidated damages for late delivery | 0.5% a week, capped at 5% |
| Price adjustment: index weight, index fall at mid-year | 60% / 4% |
| Second-half spend affected by the index | 2,400,000 |
| Payment terms / average days actually paid | 60 / 41 |
| Cost of funds | 6% |
| Same items bought off contract / premium over contract price | 650,000 / 8% |
Leakage = Σ (value the contract entitles you to − value received), term by term
Leakage % = leakage / total addressable spend, on and off contract
In Excel, one row per term with its own formula, for example =OnSpend*RebateRate once the tier is crossed, =Spend*(Terms-DaysPaid)/365*CoF for payment timing and =OffSpend-OffSpend/(1+Premium) for off-contract buying.
1. Overcharges. 338 lines carried a price above the contract schedule, on 18,000 units at an average of 2.40 too much: 43,200.
2. Unclaimed rebate. Spend of 4,800,000 crossed the 4,500,000 tier, so 1.5 per cent is due on all of it: 72,000. Nobody raised the claim, because the rebate is paid on request and the request sits with no one.
3. Liquidated damages not applied. Three orders arrived late: 120,000 two weeks late (1.0 per cent, 1,200), 85,000 four weeks late (2.0 per cent, 1,700) and 60,000 twelve weeks late, capped at 5 per cent (3,000). Total 5,900.
4. Index reduction not applied. The price adjustment formula weights the metal index at 60 per cent. A 4 per cent fall at mid-year should have cut the price by 2.4 per cent on 2,400,000 of second-half spend: 57,600. The supplier applies increases promptly and reductions on request.
5. Paying early. Terms are 60 days; invoices were paid in 41 on average. Nineteen days of 4,800,000 at a 6 per cent cost of funds: 14,992.
6. Off-contract buying. 650,000 of the same items went through a catalogue at 8 per cent above contract. At contract prices they would have cost 650,000 / 1.08 = 601,852, so the leakage is 48,148.
| Source | Leakage | Share | Recovery odds | Expected recovery |
|---|---|---|---|---|
| Unclaimed rebate | 72,000 | 29.8% | 95% | 68,400 |
| Index reduction not applied | 57,600 | 23.8% | 80% | 46,080 |
| Off-contract buying | 48,148 | 19.9% | n/a | 0 |
| Price overcharges | 43,200 | 17.9% | 90% | 38,880 |
| Payment before terms | 14,992 | 6.2% | n/a | 0 |
| Liquidated damages | 5,900 | 2.4% | 60% | 3,540 |
| Total | 241,840 | 100% | 156,900 |
Leakage is 4.44 per cent of the 5,450,000 addressable spend. Of the 241,840, the four supplier-side items, 178,700, can be claimed back, with an expected recovery of 156,900 once each claim is weighted by its odds. The other 63,140 is the buyer's own doing and cannot be recovered, only prevented next year. Put the other way, the business paid 5,450,000 for what the contract's own terms would have charged at 5,208,160.
Recovery odds are judgment, and they fall with time. Most supply contracts carry an audit window or a time bar for claims, and a rebate or credit not claimed within it is gone. Run the audit while the year is still open, not after the renewal.
| Premium over contract | 650,000 off contract | 1,300,000 off contract |
|---|---|---|
| 4% | 25,000 | 50,000 |
| 8% | 48,148 | 96,296 |
| 12% | 69,643 | 139,286 |
Off-contract buying is the one line that grows quietly. It also feeds a second line: if the 650,000 had gone through the contract, on-contract spend would have reached the rebate tier sooner and with more margin, which is the protection the tier was negotiated to give.
The common mistake is to count off-contract spend as leakage. The 650,000 bought real goods that the business needed; the leakage is only the premium paid over the contract price. And the premium must be backed out of the price paid, not taken as a percentage of it: 8 per cent of 650,000 is 52,000, which overstates the true 48,148 because the 8 per cent was a mark-up on a smaller base. The second mistake is to measure leakage against budget. A budget miss mixes leakage with volume and mix; leakage is measured only against what the contract itself says, term by term.
Leakage is also why reported procurement savings shrink on the way to EBITDA, worked in how to calculate procurement savings and their EBITDA impact, and why the arithmetic of the index clause matters, in how a price adjustment formula works. The book prices every clause of two real bids as money, with the free workbook for this case on the Contract Management companion page.
It depends on the contract and the controls, so measure it rather than borrow a survey figure. In the illustrative audit it is 4.44 per cent of addressable spend, 241,840 on 5,450,000, and over half of it comes from two passive items: a 72,000 rebate nobody claimed and a 57,600 index reduction nobody applied.
Partly. Overcharges, unclaimed rebates, credits and index reductions are the supplier's to repay if claimed within the contract's audit window or time bar. In the illustrative case those four items total 178,700 and, weighted by the odds of each claim, 156,900 is expected back. Early payment and off-contract buying, 63,140, are the buyer's own and can only be prevented.
As the premium paid over the contract price, measured on the price paid. Buying 650,000 of the same items at 8 per cent above contract means they would have cost 650,000 / 1.08 = 601,852 on contract, so the leakage is 48,148. Taking 8 per cent of 650,000 gives 52,000, an overstatement, and counting the full 650,000 is simply wrong.
This article is one calculation from Contract Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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