We receive many requests for proposals (RfPs) to provide model audits and they do vary enormously in the amount of detail included. We thought it would be helpful to give our view of what it is helpful for us to know to give you the most informed quote – and also some things to think about to ensure you obtain the right information from us or our competitors, these are summarised below. We’ve also put together a free template RfP for a model audit (financial close).
Information about your project
It is always useful to have background on the project and the identities of the investors. If we are being asked to work on a bid we are likely to want to form a view on how likely a consortium is to win the bid (we can judge this if we know who is participating and how much competition there is) and how likely the project is to actually reach a timely financial close. The amount of further detail we need will depend on how unique your project is. If the intended structures are particularly complex then its probably a good idea to have an initial call with us to discuss potential approaches to the model audit in more detail. You can then issue an RfP which is targetted appropriately for your project.
Information on the model
Some model auditors (especially those doing “cell-by-cell” style review) will ask for the number of unique formulas in order to provide a quote. While this information is of interest to us, except in the case of standard or repeat transactions, we would much prefer to actually see the model we are being asked to price. We are always happy to: agree a non-disclosure agreement, view an anonymised version of the model, to visit your offices to view on screen or a combination of all three of these options to facilitate this.
Scope of work
Defining a precise scope of work is fundamental to obtaining a quote. In the template RfP we have prepared (template RfP for a model audit (financial close)) we have set out a suggested approach. There are a couple of things that we would suggest it is worth bearing in mind:
- if you are asking us to give a definitive opinion we are likely only going to be able to provide that on the base case of the model and pre-defined sensitivities. It is very difficult to give an opinion which effectively says the model “works” no matter what combination of variables are applied as inputs
- if you do not need a definitive opinion but instead require a “high level” review it is important to make this clear. It is less risky for us to provide an opinion which is based on procedures which we agree are appropriate for testing the model’s accuracy (ie an “agreed upon procedures”) review than it is for us to sign off a definitive opinon that the model is indeed accurate. This will make a material difference in our approach to pricing.
It is of course helpful for us to know what the key project milestones are for your project and what sign offs you will require at which stage. This enables us to ensure we have the requisite resources in place. You may also want to suggest a “long stop” date ie a reasonable period by which you would expect us to hold any fixed fee arrangement.
Iterations and sensitivities
It is common for model auditors to quote the number of iterations of review that they will undertake for a fixed price. To ensure comparability of bids it is helpful to specify the number of iterations you want included at a fixed price and how much is the cost for additional iterations. We also suggest it is worth being clear that you would only expect substantive model changes (we’ve proposed wording in our template RfP) to count for iteration purposes otherwise some model auditors may seek to charge for iterations which only constitute a minor input change.
Similarly to provide a consistent basis for quoting you should specify how many sensitivities you will want run on the model, to ask for a fixed price for this amount and a variable cost for additional sensitivities. It is also worth asking how much it costs to review additional iterations of sensitivities i.e., what happens if there are issues with the sensitivities that are run, what is the model auditors approach to charging for these?
A key issue for model auditors (and professional advisors in general) is who will seek to rely on our work. We will always want to ensure that the parties who wish to rely on our work sign up to our engagement terms, primarily this is because we want to ensure they are covered by our caps on liability. So it is helpful to be clear who will need to rely on our work at each stage of your transaction e.g., will the procuring authority or other investors or lenders ultimately want to rely on our work. There may be a cost implication to such requests but it is better to agree these upfront while the tender for the audit is in process rather than wait until later when the work is done and the successful model auditor has more power to negotiate fees.
In relation to liability we at Mazars, and we believe this is fairly standard practice, will provide separate liability caps for the different parties in the transaction. It is therefore helpful to know your expectations of the cap you require for each set of parties.
In the event that you wish to ultimately claim against the model auditor (e.g., because they fail to spot a material error) it might be worth finding out what assurance they can give that they will have relevant insurance at the time you might make a claim (as this is the relevant policy not the one they have today). This may also lead you to consider whether the tenderer is likely to continue to be a going concern at that time i.e., is the firm sufficiently large and robust with a credible track record. In our view a boutique operator is less likely to be sufficiently robust to meet one or more claims than a larger firm.
Approach to pricing
You may wish to give the tenderers a steer as to your preferred approach to pricing e.g., fixed or variable pricing, a success based structure, a retainer element or any combination of these.
It is also helpful to know in which currency you would prefer to settle fees and your expectations as to when fees will become payable e.g, on a monthly basis or transaction completion.
Track record and approach
It is of course good to understand whether the tenderer has relevant experience. We would suggest that as well as the experience of the firm you will want to know that the team that is being proposed for your project has relevant experience. So it is a good idea to get both details of the firm’s relevant experience and tailored CVs of the proposed team.
In terms of approach, the importance of this section will depend on the complexity of the project. If it is a complex project where you have met the tenderer to discuss in detail, you will want to ensure they have understood your detailed requirements. When it comes to how the tenderer is going to ensure the correctness of model logic we of course would always favour an auditor who favours shadow modelling and analytical techniques as opposed to traditional cell-by-cell methods.
Form of proposal
As well as ensuring that tenderers provide the information supplied above – and you may want to specify how you want the response organised so you can directly compare proposals – I would always advise that you ask the proposer to provide a draft of their actual contractual proposal or engagement letter and any associated terms and conditions. This will allow you to see the actual contractual offer and avoid any nasty surprises when it comes to agreeing terms with the successful tenderer.
themodelauditor.com is the blogsite of the Mazars model audit team.
You can also follow us on twitter @themodelauditor