Audit rights clause
A right to inspect the other party’s records or systems to check that it is complying with the contract, such as its billing or license terms.
What it means
An audit clause lets one party examine the other’s books, records, or operations to verify compliance. Customers use audits to confirm that invoices, especially time-and-materials or cost-plus bills, are accurate. Software vendors use them to confirm a customer is not using more licenses or users than it paid for. Audits can also cover data security and regulatory compliance.
A typical clause allows one audit a year, on reasonable notice, during business hours, often by an independent accountant bound by confidentiality. If the audit finds an underpayment, the audited party pays the difference, and if the shortfall is above a threshold, often 5 percent, it also pays for the audit. For a small business, a software license audit can produce an unexpected bill for back fees.
Audit rights favor the party doing the auditing, and they cost the audited party time and disruption. Reasonable limits include a notice period, a frequency cap, a look-back period, confidentiality, and restrictions on who performs the audit. Audit clauses usually come with record-keeping duties that can last years after the contract ends.
What to watch for
- Check how often audits can happen, how much notice is required, and who can perform them.
- See how far back the audit can look and how long you must keep records after the contract ends.
- Look at who pays for the audit and the threshold that shifts the cost to you.
- Confirm what you owe if an underpayment is found, such as back fees, interest, or fees at full list price.
Example clause
On at least 30 days’ written notice and no more than once per calendar year, Licensor may have an independent auditor, bound by confidentiality, review Licensee’s records to verify compliance with this Agreement. If the audit reveals an underpayment of more than 5 percent, Licensee will pay the underpayment and the reasonable cost of the audit.
The licensor can check your usage once a year with notice, and a significant shortfall makes you pay for the audit.