How to Do Construction Billing in SAP-Down Payment Chain

MENU

Follow

SAP Services and Implementation How To Do Construction Billing In SAP Posted Post ed by Wolfgang Flatscher   on 22-Jul-2014 13:10:26 Tweet

1

Construction Billing Billin illing g (debit side) and Payment Certificates (credit side) have to follow special procedurers. This includes cumulative billing, advance payments, valuations of material on site and retentions. Besides the complexity of the process itself there are multiple postings po stings to different G/L accounts involved. Until recently this was not (or only with custom development) possible within SAP. Now "DPC DPC"" (Down Payment Chains) Chains ) were added as an enhancement by SAP. They are released in the standard version only for Germany and Austria but the functionality is suitable for other countries and in i n  parti particular the MENA region as well. This blog focusses on billing and sub contractor payments (screen shots are for the latter) based on valuations of progress and excludes other forms like milestone or cost plus biling.

SAP   has many "hidden" SAP "hidden" features. They are all documented but maybe never discovered unless unle ss you really focus focu s on a niche and are connected in the community. DPC - Down Payment Chains is such a feature. It was developed for the construction industry and should be used by every contractor or client. We will explain how it works in detail.

Get the Activation Approved DPC are included in the standard SAP. But they are activated only in German and Austrian installations. In all other countries, you have to activate the functions EA-FIN and LOG_FI_DPC_MM_1 by applying the note 1679235 (Pilot SAP Note: Release down payment chain for all countries).

You have to confirm that you will validate that the procedures are compatible with the financial and legal requirements of your country. This risk seems to be the reason why SAP doesn't release DPC for all countries. We know the German way of billig and the principle is exactly the same as in the MENA region (they usually don't have advance payments or value material on site). So we included DPC in our PreCast template for SAP software. This includes the complete configuration.

Transaction codes for DPC

Construction Billing Procedure Just to make sure we are on the same page let me summarise the characteristics of  construction invoicing. You received a project award from a client. The BoQ (bill of quantities) includes the scope of work. It is described in items which also have a unit of measurement (UoM) and your sales price (even if it is a lump sum contract). So the BoQ is your sales document. Billing is based on the value of the work done. So you measure the work (by UoM), multiply it with the unit rate of the item and summarise all values in each period. This is called the valuation.

Cumulative Billing Usually the periodic (monthly) billing is cumulative. This means the valuation includes all work performed and not just the work of the last period. The reason behind this is simply that it is easier to measure all work done to a certain date. From the cumulative valuation the amount of previous payments is deducted - leaving the value of the last period.

Retentions If the contractor would not complete his contract the client would have extra cost for finding a substitute. To cover for this risk a retention is deducted by the client. The retention typically ranges between 5% and 10%.

Other Amendments There are other amendments to the invoice. In the Middle East advance payments are usual to cover for the site praparation cost. The advance is paid back by deducting portions from the next period invoices. Material on site (but not consumed yet) can

also lead to increased valuations depending on the contract. There are examples, such as damages, that lead to adjustments.

Applcations for Payment and Payment Certificates So far I used the term "invoice". This is not quite correct because an invoice is a document which is legally binding. It is based on a contract and has payment terms. But as the valuation is based on your measurement the client must have a chance to check the work performed himself before the payment term starts. Therefore the contractor sends an "Application for Payment"   first, the client re-measures and calculates a so called "Payment Certificate". It is sent to the contractor and if he accepts it then he will finally send his invoice based on this payment certificate.

Invoice Types In order to manage the invoicing from start to end you need multiple invoice types. Advance  payment Partial  (or progress) invoice Final  invoice At the time of the final invoice the rention amount is released (because the risk of the contractor not completing the contract is dissolved; there can be a warranty amount deducted though). Correction Settled disputes can lead to corrections of previous invoices which have to be posted as corrections. I assume that for the experienced reader this is all daily practise. But the description of the process is also a scope definition of SAP's DPC functionality.

Payment Certificate in Detail We describe the workflow for the payment of a sub contracted work. The workflow for billing the client is the same, the payment chains are just linked to a sales order instead of a purchase order.

Purchase order for sub contracted work

The purchase order (PO) is a single line item. If the sub contracted package had several WBS Elements assigned then one line item for each WBS Element is required (this is done automatically with our PreCast solution). As you can see, quantity and rate were exchanged. This is the standard method to allow entering the values of the work performed as quantities in so called Service Entry Sheets (SES).

DPC chain number created If the DPC functionality is activated you have an additional tab in the PO screen. The system creates a DPC chain number and links the DPC with the PO. With the chain number the DPC can be opened and payment terms as well as other items can be entered. In our sample, a 10% retention was defined.

DPC payment terms and retention After releasing the DPC we can now start posting payments. First we create a request for advance payment.

Creating an advance payment request You can always display the tab "Purchase Order History"   to see all transactions made through DPC.

Now we create a partial invoice. As the payments are linked to Service Entry Sheets (SES) we have to create the SES entry first. In our PreCast configuration the invoice from the sub contractor will be verified. The maximum amount that can be paid is the value of the SES linked to the PO.

SES created with a value of SAR 400,000

SES accepted When you save and accept the SES a Goods Received (GR)   document is created (in our PreCast solution   in the same step the actual cost is produced). Now we have a liabilty against the sub contractor and can process a partial payment.

Creating a partial invoice (progress payment)

Details of the partial invoice As you can see the DPC for our PO picked the value from the SES and also deducted the retention amount to calculate the payable amount. No side calculation is required and the invoice is verified   through the SES. Now we are ready to create the final invoice   after the rest of the work was performed and a value of SAR 600,000 was posted in the SES.

Details of the final invoice As you can see the final invoice includes the value of work performed in the last period plus releases the retention amount   held back. The advance payment was paid back before this transaction. The DPC displays now as

Down Payment Chain after final invoice (status is red because payment is overdue)

Payment history after final invoice The payment history now shows the complete cycle. We had SAR 200,000 down payment which is now balanced and a total of SAR 1 million of value received and invoiced. Note that the retention amount is a payment condition known to the DPC but not to the SES. Therefore it doesn't appear in the PO history.

SAP for Construction Billing and Payments You have seen that SAP's DPC enhancement covers the processes of construction billing and payments to sub contractors perfectly. DPC in particular supports Cumulative billing Billing based on valuations Advance  payments Retentions  and other amendments of the payable amount Partial  (progress) and final invoices  and corrections We strongly recommend that contractors implement and use DPC. Currently the majority of contractors are calculating the payable amount externally and enter the value when making payments. This has major disadvantages. The financial reports don't include retention amounts (revenue and payments held back not reported) Invoice verification is not correct  (retentions and other amendments not calculated) Previous payments could be calculated incorrectly Utilising DPC for construction billing includes all transactions involved in the process. The process therefore is auditable, secure and straight forward. Every detail is included correctly in the financial reports.

ConCost therefore included SAP's Down Payment Chains in its PreCast template for SAP software.

Download the PreCast Scope of Work

Topics: Information Technology, Finance

Got comments.

We would love to have your feedback.

First Name * Last Name

Subscribe to ConCost Blog Email * Website Comment*

Subscribe to follow-up comments for this post

Type the text Privacy & Terms

Submit Comment

About this blog The ConCost blog aims to provide information to the construction industry.

We gained

our expertise working for engineering and construction companies, owner and Government organisations on all continents for many years.