Tony:
Hello, I’m Tony Mangino from TC2, and this is Staying Connected—the podcast where we talk about what really matters to enterprise customers navigating today’s technology and sourcing decisions.

Today we’re going to talk about two contract provisions that can look pretty routine when a deal is being negotiated but become very important when something goes wrong: supplier back billing and the customer’s right to recover billing errors.

The first question is straightforward. If a supplier fails to bill you correctly today, how far into the future should it be allowed to come back and collect those missed charges?

But there’s another side to that. If the supplier has been overbilling you, how far back should you be allowed to go to recover the money?

We recently looked across a group of enterprise agreements, and the variation was significant. Supplier back-billing limits ranged from roughly three months to twelve months. Customer recovery periods for billing errors ranged from three months all the way to twenty-four.

So there clearly isn’t one universal market standard.

Today I’m joined by my colleagues Theresa Knutson and Jaime Hansen to discuss these two provisions and why they matter.  Theresa, Jaime, welcome.

Theresa, let’s start with you

Theresa:.

These provisions may look administrative in the contract, but they determine how much historical exposure each party carries when somebody discovers a billing problem.

What Back Billing Actually Means

Tony:
Let’s start with the supplier side. What do we mean by back billing?

Theresa:
Generally, it’s a situation where the supplier discovers that it failed to invoice something when it should have.

Maybe a service was activated, but never added to the bill. A recurring charge was missed. Usage wasn’t captured properly. Then six months or a year later, the supplier identifies the issue and sends the customer an invoice for the historical amount.

From the supplier’s perspective, the argument is simple: the customer received the service, so the charge is still owed.

Tony:
But the customer has a legitimate concern too.

Those accounting periods may already be closed. Budgets have moved on. The service may have changed or even been disconnected. And the people who understood what happened may no longer be involved.

Theresa:
Right. At some point, the supplier’s failure to bill accurately has to become the supplier’s responsibility rather than an unlimited customer liability.

That’s why a back-billing limitation matters. It puts a boundary around the exposure and creates an incentive for the supplier to operate its billing systems properly. This risk is of particular concern if you have circuits in many countries—we often see instances where circuits aren’t billed in a timely manner and when discovered, the supplier just bills everything back to install date, regardless of what your contract says.   That means you have to know these back billing intervals and have controls in place to monitor billing.   If you find back billing beyond the contractual timeframe, you have to open a dispute and then work that with your supplier to resolve.   That can take months.   It takes great patience and fortitude.    Suppliers will bill everything and expect you to catch it;  if you don’t, they can take that revenue to the bank.

Now Turn the Situation Around

Tony:
Now let’s reverse it.

Suppose the supplier didn’t underbill. It overbilled.

Jaime, how long should the customer have to identify that error and recover the money?

Jaime:
That’s where enterprises sometimes accept language that is more restrictive than they realize.

You may have an audit right or the ability to dispute incorrect charges, but the agreement may only allow recovery for the previous six or twelve months.

So if an error has been occurring for two years, you might be able to prove that you were overcharged for two years, but still recover only a portion of it.

Tony:
Which means the right to identify the error and the right to recover it are not necessarily the same thing.

Jaime:
Exactly. The recovery period can be every bit as important as the audit right itself.

Is Symmetry Really Fair?

Tony:
I can imagine a supplier saying, “If we only get six months to back bill you, then you should only get six months to recover from us.”

On the surface, that sounds fair.

Jaime:
Well, it’s reciprocal, but that doesn’t necessarily make it equitable.

The supplier controls its own billing system. It knows what services it delivered and what it intended to charge.

The customer may be receiving thousands or even millions of invoice line items across a large technology estate. Usage-based services, for example, are quite cumbersome.  There are layers of details beneath a single line item on an invoice with multiple inputs that determine the rate charged to the customer.  Finding an error can require contract interpretation, inventory reconciliation, usage analysis, and sometimes a formal audit.

So there’s a reasonable basis for the customer recovery period to be longer than the supplier’s back-billing period.

Tony:
That’s an important distinction.

Equal time periods can look balanced on paper while allocating the practical risk very differently.

The Contract and the Audit Process Have to Work Together

Tony:
There’s also an IT Cost Management issue here and a TEM issue.

Let’s say my agreement only gives me twelve months to recover an overcharge. What does that mean operationally?

Jaime:
It means your controls need to be capable of finding problems inside that window.

If you (or your TEM) perform a major billing audit only once a year, by the time you gather the data, investigate an issue and establish the claim, some of the oldest charges may already be outside the contractual recovery period.

You can literally be losing recoverable dollars while the audit is underway.

Tony:
So the contract creates the right, but the operating process determines whether you actually preserve it.

Jaime:
That’s the connection between Contract Compliance and IT Cost Management.

A shorter recovery period requires more continuous validation. A longer period gives the enterprise more time to identify systemic problems before its rights expire.  And remember that the timeframe that starts the audit recovery right is from when you file a claim, so say your contract says you can recover 12 months for audit errors, you file a claim and it takes the supplier 3 months to resolve the error after notification, you should receive 15 months of credit.    Keep all correspondence and trouble tickets about issues and make sure to have a way to monitor each issue through to resolution.   And as Theresa mentioned earlier, all of this takes great patience and fortitude;  and attention to detail.

The Biggest Errors Aren’t Always Obvious

Tony:
And many billing errors aren’t a giant charge that immediately jumps off the invoice.

Jaime:
Often they’re much less visible.

It could be a negotiated discount that wasn’t applied. A disconnected service that continued billing. A credit that never showed up. The wrong rate applied across hundreds of services.

Individually, those charges may not attract much attention.

But if the problem continues across a large estate for eighteen or twenty-four months, the cumulative value can become significant.

And if your recovery right only reaches back six months, much of that value may already be unrecoverable by the time you find the problem.

Negotiate the Rules Before You Need Them

Tony:
So  Theresa, what should an enterprise be thinking about when these provisions are negotiated?

Theresa:
On supplier back billing, I’d want a clear limit on how far the supplier can reach back for charges it failed to invoice properly.

The exact period can vary, but the important thing is that the exposure is bounded.

For customer claims, I’d want a recovery window that realistically reflects how billing errors are discovered and investigated.

And I would not assume that the two periods need to be identical.

I also suggest that you make a chart of your top 10 suppliers and have a column with back billing period and audit recovery periods noted.   You will likely see that each supplier has slightly different timeframes.     The goal is to get the back billing period (3 months)  as short as possible and your audit recovery rights as long as possible (24 months).

Tony:
The wording around the timing matters too.

Are we measuring from the service date? The original invoice date? The date the customer discovered the problem? Those distinctions can materially affect the result.

Theresa:
They can. And the agreement also needs to be clear about whether the limitation applies to all billing issues or whether certain circumstances are treated differently.

The number of months matters, but so does the language around it.

Recovery Should Fix the Run Rate

Tony:
Let’s say we find the error and recover the historical overcharge. Are we done?

Jaime:
No. Recovery is only part of the value.

You also need to understand why the error occurred and make sure the underlying billing issue is corrected.

Was the inventory wrong? Was a contractual rate never implemented? Was a disconnect missed? Is the same problem affecting other services?

The bigger objective is to prevent the error from continuing.

Tony:
Which is where this becomes IT Cost Management (and TEM service/audit management) rather than just an audit exercise.

Recovering money is useful. Protecting the future run rate is usually more valuable.

Jaime
And the history can matter at renewal as well. Repeated billing errors, missed credits, or weak billing controls can influence governance requirements and give the customer additional leverage in the next negotiation.

Closing

Tony:
So the takeaway is that back billing and audit recovery periods are not simply contract housekeeping.   Theresa, any closing thoughts?

Theresa: 

These provisions determine who bears the financial risk when billing goes wrong.

In the agreements we reviewed, supplier back-billing rights ranged from only a few months to roughly a year, while customer recovery rights ranged from similarly short periods to as long as two years.

The right answer won’t be identical in every deal. But before signing, enterprise customers should understand three things: how far back the supplier can reach, how far back the customer can recover, and whether the organization’s billing and audit processes are actually capable of protecting those rights.  If you use a TEM, make sure that they do their deep dive audits on a schedule that matches the audit recovery period by supplier.

Because finding a billing problem is only valuable if you still have the contractual ability to recover it—and if you fix the issue before it continues into the next invoice.

Tony:

I think that is a great place to leave it for today.  To our listeners, if you would like to discuss billing compliance, back-billing protections, audit rights, or how contract compliance can support broader IT cost management, or if you’d like to discuss other technology strategy, sourcing and cost reduction needs with Theresa, Jaime, or me, or any of our TC2 and LB3 colleagues, please give us a call or shoot us an email.

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