Services Procurement Audit: The Spend Nobody Verifies

Most owners can tell you what they paid per tonne of steel last month. Ask what a security guard shift costs, or whether the AMC vendor actually made the twenty-four preventive visits billed for the year, and the room goes quiet. Materials procurement gets attention because there is something physical to count. Services — manpower, housekeeping, security, transport, annual maintenance, professional fees — arrive with no goods receipt note. In a business between Rs 100 crore and Rs 1,000 crore of turnover, services can quietly account for a tenth of total spend while receiving almost none of the control effort.

Why a services procurement audit is different

The three-way match — purchase order, goods receipt, invoice — is the backbone of procurement control. For services, the middle leg is missing. What replaces it is a signature from the user department, rarely tested and often given without checking anything.

Three consequences follow. Quantity becomes unverifiable after the fact; nobody can prove in October how many guards were on duty in June. Rates hide inside lump-sum monthly billing, so year-on-year increases go unnoticed. And contracts auto-renew, so a vendor engaged for one plant keeps billing long after that line has shut down.

Start with a simple report: services spend by ledger head for the last two financial years, with vendors ranked by value. Most owners are surprised by what sits at the top.

Manpower and security: the compliance you inherit

If your contractor does not pay his workers, or does not deposit their provident fund, the exposure often lands on you. India's four labour codes came into force on 21 November 2025, and contract labour is now governed by the Occupational Safety, Health and Working Conditions Code, 2020. The threshold for the contract labour provisions has moved from twenty workers to fifty, the licensing regime continues, and the principal employer remains liable for wages the contractor fails to pay and for prescribed welfare facilities.

Four tests that find real money and real risk:

• Match the biometric or gate attendance record for one month against the muster billed. Ghost headcount is the most common finding in manpower contracts.

• Do not accept a PF challan as proof of compliance. Ask for the electronic return and check that the UANs of the people billed to you actually appear in it.

• Confirm the contractor's licence is current and covers the number of workers actually deployed.

• On security services, where the provider is not a body corporate, GST is payable by you under reverse charge at 18% and must be discharged in cash, not adjusted against input credit. Companies frequently end up bearing the tax twice on the same invoice.

AMCs, transport and proving the service happened

An annual maintenance contract is a promise of visits. Ask for the visit log against the contracted schedule, then ask who signed each service report. A pattern of reports signed by one person, or dated in a batch at month-end, is worth pursuing.

Two further checks consistently pay for themselves. Reconcile the assets covered by AMC against the fixed asset register — companies routinely pay maintenance on machines sold or scrapped years ago. And on transport, compare freight per tonne-kilometre across routes and vendors rather than looking at the total; detention and demurrage charges should trace back to a documented cause, and if nobody in your company can explain a detention charge, it should not have been paid.

The bottom line

Services procurement fails quietly, because there is no shortfall in a store to trigger a question. A services procurement audit therefore has to manufacture the evidence that materials procurement gets for free: a written scope, a measurable unit, an independent record that the work happened, and a rate that can be compared with something.

Three questions worth putting to your CFO this quarter. What is our total services spend, and who are the ten largest vendors by value? For each of them, when was the rate last benchmarked against the market? And which service contracts renewed this year without anyone actually taking a decision?

By CA Dhruv Seth, Seth & Associates, Chartered Accountants, Lucknow

This article is for general information and does not constitute audit, legal or tax advice. Regulations change; please verify the current position or speak to a qualified adviser before acting.