Internal Audit of Manpower Supply Contract

Background

Manpower is the one of the most important factor to run any industry. Every sector whether it is manufacturing or servicing needs manpower for its smooth functioning. The Organisation hires contractual workers for its different functions like security services, construction work etc. In this article, we will discuss how an auditor should review an entity’s contracts with vendors related to manpower supply.

Brief Overview

As per the standard process followed across the industry, following are the steps involved for awarding contract related to manpower supply:-

i) The User department (such as production, facility, finance department) raises the work indent (like PR in case of goods) for manpower requirement to the Personnel department as per the policy defined by the Company.

ii) On the basis of the indent received from the concerned User, the Personnel department shall first seek availability from within the organisation and if requirement is not fulfilled then prepare a list of the prospective contractors or may publish an advertisement in appropriate media for Request for Quotation (RFQ).

iii) The Personnel department shall allow the prospective contractors to visit the site of work or provide the technical information about the scope of work before submission of tender.

iv) The Personnel department shall receive the tender along with the Earnest Money Deposit (EMD) if applicable. The department shall compare the tender received with the RFQ and discuss deviation with contractors, if any.

v) The Personnel department shall forward the technical details of bid to the concerned user department for preparing the comparative technical evaluation chart and give their recommendation.

vi) On the basis of the technical and financial comparative statements, the Personnel department shall shortlist the Contractors and conduct the negotiation with them.

vii) On the basis of final negotiation the selected contractors shall be given Work Order (like PO in case of goods) after due approval from the appropriate authority.

Audit procedures needs to be followed in each step:  

1) Indent raised by the User Department

Auditor shall consider the following points:-

• Check the annual budget amount for the indented service. Verify if suggested amount in indent is within the budget. If it exceeds the budget, whether approval from the appropriate authority has been taken or not.
• Work indent should contain detailed work description as well as the required manpower like Skilled, Semi-Skilled or Un-Skilled along with estimated cost and basis of the same.
• Indent must be approved as per the Delegation of Power (DOP).
• Auditor shall compare the current indent with the similar PO / Indent raised in the last period to note if there are any significant changes (in terms of rate, quantity, terms etc.) which require attention and shall assess their subsequent effect.
• Check if multiple indents have not been raised for the same requirement.

2) Sending of Request for Quotation (RFQ) to Receiving of Tender

Auditor shall consider the following points:-

• Check that RFQ must contain following points:

a) Details about the nature of services required.

b) Scope and period of work.

c) Payment schedule including commercial and technical terms.

d) Price bid format.

e) Last date for submission of bid.

• Verify that RFQ has been sent to all the shortlisted contractors as per the Company’s policy by mail, courier, newspaper etc.
• Check the number of tenders along with EMD, if applicable, as per terms & conditions of RFQ have been received from the prospective contractors. Preferably, it should be 3 or more. Auditor should ensure that only tenders which are received before due date have been taken into consideration for further process. In case of any deviation, approval from the appropriate authority must have been taken.
• Check the technical comparative statement prepared by the user department. Following shall be taken into consideration for technical comparability in case of Manpower supply contract:-

a) Registration under the Contract Labour (Regulation & Abolition) Act, 1970.

b) Registration under Employees’ Provident Fund & Miscellaneous Act, 1952 and Employee State Insurance Act, 1948.

c) In case of security services, registration under The Private Security Agencies (Regulation) Act, 2005.

d) Experience letters from the clientele they served.

e) Any other specific requirements as per the RFQ.

 The user department shall put forward his recommendation.

• Check due negotiations has been done with the contractors  and financial comparative statement has been prepared by  considering only those contractors who are eligible as per the technical aspects.

• Check contract has been awarded to L1 vendor provided laws pertaining to minimum wage of the respective states have been complied and regret letter has been sent to all other contractors specifying the reason for non-selection as per the policy of the Company.
• Verify the service order has been issued to the selected contractor as per the rate finalised in the bidding process and specifying all other terms & conditions especially the liability of gratuity as well as other statutory payment.

3) Review of Service Order:

Auditor shall consider the following points:-

• Check if the service order has been duly approved as per the authority level defined in the policy.
• Check if the order has been raised only after the indent has been issued by the user department except for emergency purchases.
• Check if the order has been raised within the timeframe of the policy.
• Review all the emergency orders, its rate and check if they are as per the defined policy.
• Check if multiple orders have not been raised for the same requirement.

Invoice Processing to Payment

Auditor shall consider the following points:-

• Verify the rate considered in the invoice is same as the rate in the issued service order.
• Auditor should cross-check the muster roll provided by the contractor with the attendance register maintained in the Company before making any payment.
• As per the Factories Act 1948, The Payment of Wages Act 1936 and all other labour related laws, principal employer is responsible in case contractor is not complying with any of the given laws. Hence, auditor should focus on the compliance as required under different laws. For example :-

a) As per the Payment of Wages Act 1936, the principal employer is responsible where wages have not been paid to labours within the 7^th or 10^th of the following month as the case may be.

b) As per the Factories Act 1948, the principal employer is responsible where the total working hours in a week exceeds 48 hours.

c) As per Employees’ Provident Fund & Miscellaneous Act 1952 and Employee State Insurance Act 1948, principal employer is responsible if contractor fails to pay the due amount or filing of return.

Similarly, principal employer is responsible wherever original employer fails to comply with any labour laws. The auditor needs to pay special attention in this respect.

• Ensure that every part of amount charged from the principal employer except contractor’s commission is credited into the labour’s bank account. Auditor may refer payment advice or salary slip provided to labourers.
• In several cases, it is observed that contractor does not pay the entire PF or ESI portion charged from the principal employer. The company should discharge the PF & ESI portion of the current month after receiving the details of the same paid for previous month. Auditor should ensure that entire PF & ESI is deposited for each employee. Auditor may refer the submitted Employee Challan cum Return (ECR) in case of PF and payment challan & return filed in case of ESI.
• It is also noticed that contractors are not transferring benefit availed by them from Government schemes to the Principal employer. As a result, contractor earns excess amount in form of such benefit apart from his portion of commission.

For example – As per Pradhan Mantri Rojgar Protsahan Yojna (PMRPY) w.e.f 01.04.2018 the Government announced to pay the Employer contribution portion to PF till 31.03.2021 in case of new employees registered up to 31.03.2019 and having salary below Rs. 15,000. However, the contractor claims the same amount from the Principal employer. Auditor should refer ECR challan for any such benefit availed by the contractors but did not transfer to principal employer.

• Generally, contractors collect one time payments like bonus to workers on monthly basis from the company. However, these are ultimately paid to the workers during last month of the year or during any festival. Auditor should recommend the company that it should be paid to contractors at the time when these are credited to workers instead of monthly basis as it will help in releasing working capital funds which used to get blocked due to monthly payments.