How to Draft and Negotiate Audit Provisions

What is an audit provision?

Audit provisions permit one party to review and inspect information about the other party.

What is the best practice for drafting audit provisions? 

Most audit provisions include these seven concepts. How you word each of these elements depends on whether you will likely be the auditor or the auditee.

1. What is the scope? You can narrow the scope to just review payment calculations or broaden it to review anything and talk to anyone related to the agreement.
2. Who can perform the audit? Some allow the other party to conduct the audit, while others limit permission to an independent auditor under an NDA with the auditee.
    
3. How often? You could say as often as the auditor wants or limit it to once per year.
4. When? Some have no timing restrictions, while others say only during regular business hours.
5. How much notice? You can allow any time (so surprise audits) or only with 30 days’ notice.
6. What are the consequences? You may require the auditee to pay any underpayment plus audit costs and have more frequent audits. Or you can require both sides to pay any difference found.
7. Does the audit right survive termination? In some agreements, it ends with termination, while in others, it may survive indefinitely. I typically want the audit survival to last as long as any regulatory requirements applicable to the contract or are other ongoing obligations.

What other resources can help me learn about audit provisions? 

Here are some other resources and articles that you may find helpful:

• How to Contract's Audit Provision Checklist by Laura Frederick and shared in How to Contract's Boilerplate Learning Hub
• Drafting and Negotiating Effective Audit Provisions by Bradford C. Auerbach for OutsideGC 
• Law Insider's sample audit provisions