Discretionary Audits

A discretionary audit is a verification that the Government of Canada chooses to carry out on a contractor's profit. It can cover one contract or a series of contracts. The CanadaBuys Supply Manual glossary defines it as verification conducted on a discretionary basis, which means Canada decides when and whether to audit.

The glossary also describes a second use: verifying that Canada was not charged more than the lowest price charged to another customer. The Supply Manual ties this verification to a price certification on negotiated firm-price contracts. In short, the supplier certifies its price or profit, and Canada keeps the right to check that certification later.

How price certification links to the audit

On negotiated firm-price contracts, a supplier gives a price certification. The discretionary audit is the tool Canada uses to test that certification against what actually happened. The audit does not replace the certification. It sits behind it as a control.

Standard Public Services and Procurement Canada (PSPC) contracting language for non-commercial goods and services makes the contractor's estimated profit subject to audit, either before or after payment. The relevant text is in PSPC standard clause 12.0.

What the audit tests and what happens if profit is excessive

The stated purpose is to assess whether actual profit on one contract, or aggregate profit on a series of contracts, is reasonable and justifiable compared with the earlier price or rate certifications. The same wording appears in solicitations such as this CanadaBuys request for proposal.

If the audit finds that profit is not reasonable and justifiable, the contractor must repay Canada the amount determined to be excessive. The repayment obligation follows from the finding, so a contractor cannot treat the certified price as the final word.

Who requests a discretionary audit

Government contracting guidance states that a contracting officer may request a discretionary audit through the Contract Audit Group. The authority may arise from the terms of the contract or from section 19 of the Defence Production Act, as set out in this PSPC publication.

Discretionary audits beyond profit verification

The term is not limited to non-commercial contracts. A Shared Services Canada solicitation included a "Discretionary Audit – Commercial Goods and/or Services" clause. It required the contractor to cooperate and to provide access to the records and systems needed to verify credits. The clause appears in this CanadaBuys tender notice.

Indigenous Services Canada also uses discretionary audits under the Procurement Strategy for Indigenous Business (PSIB). They are conducted as needed to verify compliance with PSIB requirements, including the required Indigenous-content criterion. They can take place during the life of a contract when there are concerns about that content. See the Indigenous Services Canada guidance.

What discretionary audits mean for a supplier

• Read the audit clause in every solicitation. Where it is in the contract, you must cooperate with the audit.
• Keep the records and system access that support your certified pricing, profit or Indigenous content, and be ready to provide them on request.
• Treat a price or rate certification as a commitment that can be tested before or after payment.
• Plan for repayment. Amounts determined to be excessive or improperly paid must be returned to Canada.