Establishing a coherent solution design in SAP ERP to serve the EC&O Business Firms (Part 1)
Certainly, there might be several experts who might have written on this topic before, but perhaps no body has embarked on a deep dive into the nuts and bolts of implementing SAP ERP for Engineering, Construction & Operations (EC&O) companies whether they are main contractors or sub-contractors especially those based in the MENA region. In this article, I will shed some lights on the main software components in SAP that needs to be addressed properly while implementing the EC&O Best Practice provided by SAP along with some important components that should constitute the solution design. I hope the readers would find this article very useful to their implementations. In this article, I am sharing the lessons learnt from a real implementation project that was delivered recently. Knowledge sharing should become a habit and with faithful intentions towards happy and successful projects as well as satisfied stakeholders. Our continuous goal as ERP Consultants is to create value for customers, a value that was never realized before. So, by creating value to customers, you earn both respect and trust to do more business. We realize success once the customer adopts the solution and enable business firms to manage their complex projects. It’s worth mentioning that the ERP Industry and the EC&O Industry have many common grounds such as both of them are project-based companies delivering projects to others and both earn money in milestones based on agreed deliverable items to their customers. Having that said, I will demonstrate how SAP ERP fits into the EC&O spectrum and the cornerstones that should be laid down in every step of the project life-cycle.
Meanwhile, I would like to stress the importance of enabling the business functions on the SAP ERP related to the EC&O industry which is known as DIMP (Discrete Industries & Mill Products). Enabling this business function set from the Switch Framework (SFW5) by the BASIS Consultant opens a whole set of functionalities, screens, reports that are made available for these types of industries including the EC&O. If you are wondering what are these features that will be enabled, I have to say that the most important from these features in relevance to the EC&O industry are the Bill of Services (BOS) in the SD module and the Equipment & Tools Management (ETM).
Now, it’s worth mentioning that Bill of Services (BOS) depicts the Bill of Quantities (BOQs) known as a very common terminology among Engineers and Project Planners, and the EC&O community members. To understand the BOS functionalities, we need to understand the business behind it first. Perhaps, some of you are not familiar with the business. So, it’s quite important to understand the business processes in details. The details might be overwhelming at first sight but I will manage to summarize the main points at the end.
EC&O Solution Design and Business Issues
The solution design for any EC&O implementation should at least involve the deployment of the following components and I will give sufficient reasoning behind each component. I will start with the licenses BOM to be followed with the Areas to be deployed by the consultants during their project. The BOM of licenses listed below represents a personal opinion of what should be included in terms of the desirable optimum solution design and regardless of the deployment method whether on-premise or cloud options. Any customer purchasing SAP ERP or any other ERP system should expect to pay for 3 main elements: Software Licenses, Implementation Services, and Annual Support Maintenance/Service Level Agreement. I will list down the Licenses BOM and I will outline the areas to be deployed before diving deep in each area of deployment with respect to the EC&O Industry.
- SAP ERP Foundation (Basic Engine) “Licensed Product”
- SAP HANA DB (Licensed Product) / Other DBs are possible and are licensed
- SAP Professional and Project User Licenses
- SAP ETM “Licensed Product”
- SAP HCM Payroll Processing “Licensed Product” – sold in brackets of 500 Employees
- SAP Project Connector “Licensed Product” – for Integration with Primavera | Primavera is an industry mandate, irreplaceable and EC&O companies are using this software to plan/schedule their projects and monitor progress as required by consultant and industry stakeholders. Although SAP has Primavera’s business functionalities, integration/interfacing is highly recommended because without it, it will be quite challenging to arrive at the fruits of PS reports such as Earned Value Management and Progress reports. Without scheduling and durations flowing into SAP, the PS module will be only used for budgeting controls and execution and the users will be always working on different platforms or islands.
- SAP Process Orchestration “Licensed Product” (for Process Integration with 3rd party software) / BAPIs is an option but PO is highly recommended. Integration with 3rd party software in the EC&O world is very common. A common example is Candy which is a software used for Projects Estimation and Planning. This software is highly specialized in the tendering process and is preferred/recommended by planning engineers. I will showcase the solution design with and without Candy and its impact on the tendering process.
- SAP Treasury & Risk Management “Licensed Product” – This product is needed to manage the Loans and Bank Facilities to finance the business operations. This product is very rich with features and it can be further leveraged to manage financial assets and investments.
- Mobility Solution & Mobility Platform “Licensed Product” – Needed to capture and record activities performed by labor as well as their hourly confirmations. A mobility solution is not mandatory but highly recommended to realize better value and operational efficiency. When we come to real life cases of managing time sheets for thousands of labor workers in project site, you will understand the rationale behind including mobility as part of the proposed basic solution.
These would constitute the BOM but would require validation with SAP Sales Partners. The above is as per my very recent knowledge as of the date of this article. So, please refer to your SAP Partner while asking for SAP products and licenses BOM for SAP EC&O Implementations. And I will not write more about these licenses or products. These components are the basic components required to achieve an optimum, acceptable and efficient performance on the system. SAP has a complete Roadmap for the EC&O industry and they have recently unveiled new products or add-ons that complete its portfolio of products available for the industry. Nevertheless, my focus will be confined to SAP ERP only given that it’s the foundation for all business operations. So, I’m not really concerned with other SAP products that can be extremely useful for an EC&O company but probably would not be immediately needed or required by the company.
Areas of Deployment:
- Activating the DIMP Business Function framework
- SD – Bill of Services, Service Entry Sheets, Progressive & Commercial Billings with focus on Payment Terms as payment plans.
- MM – Materials Management and External Services
- PS – Project Systems & Integration with all other areas
- FICO – Financials with localization for MENA involving Retentions on Vendor and Customer along with EXIM-MENA. The latter package includes Letters of Credit and Bank Guarantees.
- EC-CS – Enterprise Controlling & Consolidation module will be needed most probably to consolidate their business divisions or Profit Centers running under the contracting company, especially main contractors employing several business units delivering projects for internal projects or external projects for other customers. Inter-Eliminations will be required as per Accounting principles and IFRS between profit centers especially if they are doing business internally. Inter-eliminations for Group subsidiaries or profit centers are possible only via EC-CS module. Otherwise, special solution design will involve SD-MM-COPA configuration in a way to cancel inter-divisions transactions appearing in the COPA reports.
- FSCM-TRM – Treasury module is needed for financing EC&O Companies and their operations that are heavily dependent on Banks’ finances. This module is used to manage bank facilities such as Overdrafts, Guarantees, Loans…etc.
- HCM – Deployment of HCM should include the localization package for the country where the EC&O company is operating. CATTS as a tool will be needed to record
- ABAP – Significant amount of special customizations/enhancements are needed due to substantial business needs that are common among EC&O Companies but are not fulfilled by standard functions. These enhancements are easily doable and covers the business. Due to the sensitivity of this point, I would like to stress the fact that SAP is a perfect fit for any business given its impressive functionalities and capabilities. The fact that the system allows for such enhancements is a clear indicator of how the system is very flexible and highly customizable to accommodate any business requirement on earth. I will dedicate a special section in this article on the exact ABAP enhancements that are needed to achieve a superb and flawless solution design on SAP.
BILL OF SERVICES (BOS) or QUANTITIES (BOQ)
Prior to any Construction project, normally the Project Customer seeks an Architecture Consultancy firm that prepares a comprehensive study for the proposed construction project. The study produces a booklet known as the Project Bill of Quantities. The customer issues a tender with comprehensive documents including drawings, quality standards of materials, and this BOQ booklet which is the core component of the tendering documents to be submitted by the bidder. Normally, the Project Customer will issue a tender for big projects that are worth millions of dollars so that they select the best offer price and how far it’s in compliance with the BOQs specs and guidelines. The project customer usually refers to the Consultancy firm to compare the different proposals submitted by the bidders to evaluate each one and gives its fair recommendation accordingly to the Project Customer.
When the bidder (the Contractor) is interested in bidding, a special team is formed by the Contracting company known as the Estimation & Planning team to prepare their response for this tender. The tender becomes a small project requiring team members to collaborate in preparing a proper tender response. Normally, the bigger the project, the more time and efforts it takes to prepare forthe tender responses. Any tender has a deadline that has to be met as well as some financial commitments including a tender bond for example which is a significant amount of money will be blocked in the bank allocated for this tender. The tender document for any construction project contain tens and hundreds of pages containing details of building materials and technical specs that should be delivered during the project course. We call these details the BOQ items or the Bill of Quantities’ items. BOQ items are not building materials solely. A BOQ item is a set of related activities to complete a significant deliverable or a phase in the project. So, for instance, Earth Excavation & Removal Works for the Foundation is a BOQ item. This can be also known as a WBS Element (Work breakdown Structure Element), a terminology that is very common among Project Planners or those who are PMP veterans. The term WBS is also a standard functionality of the Project System module in SAP known as PS. The PS module will be addressed later in this article.
Each BOQ item in the BOQ booklet is expected to be Quantified and Priced in terms of the materials needed, labor needed, and machinery needed. Interestingly, the BOQs actually comes with Quantities based on the study prepared by the Consultancy firm earlier. Accordingly, bidders are only requested to provide pricing for these BOQ Items aggregated to be the overall project price. You may find below a snapshot from a sample BOQ document that explains the above visually.
However, the Contractor might have different findings based on the Estimation team’s survey that can be conducted by analyzing the drawings and visiting the project site. These findings are normally deviations in the quantities actually needed for the project from those stated in the BOQ booklet. This deviation emanates from the difference between Consultants and Contractors. Each belong to different school of thinking and reality. Contractors possess more hands-on practical field knowledge and they have their own formulas to calculate actual activities based on historical analysis of previous projects. They deal with wastage, machine breakdowns, scrapped materials, labor over/under utilization, timelines, and capacities. In other words, the Quantities to be Quoted and delivered as per the BOQ are prepared in ideal standards by the consultants overlooking realities while each Contractor has his/her own perspective. Hence, the bidder or the construction company will usuallt have to Quantify actual quantities of each BOQ item needed to deliver it and to arrive to the proper and accurate costing of it before pricing it.
This process is done in accordance with the same exact BOQ Booklet taking into consideration that the bidder is not allowed to modify the Quantities listed in the tender documents or even the pages contents or formats. The bidder has to accommodate deviations into the prices quoted only. The reason behind this is the mandate from the Consutlancy firm to strictly comply with the Quantities in the tender documents because they will be evaluating several quotations from different bidders and the only distinguishing factor should be the prices quoted for the BOQs. Having the Quantities of materials as a variable to be filled by the bidders will add more complexities while evaluating proposals by consultants. This goes with the fact that all contractors should comply with the quality of materials to be supplied as per the tender documents.
Tip 1: The BOQs are organized in the tender documents in Bills numbered as Bill 1, Bill 2…etc. Each bill will be actually billed by the contractor during the Project Execution phase once the BOQ items of each bill has been delivered. So, each Bill becomes a Billing Document eventually issued by the SD module to be processed by the Finance Dept. for Collection from the Project Customer. You should also note that Bills can be paid partially based on actual progress meaning that the Payment Terms can be different from the Billing documents. I will outline more details on Payment Terms and its role in orchestrating the project cash flows.
Tendering Process in SAP
Now, this process is known as Tendering and it’s the starting process of any contracting business towards a new potential project. This process is part of the latest Best Practice business scenarios for the EC&O industry from SAP (China edition). Surprisingly, this process takes place solely in the SD module and has nothing to do with the PS module at this stage. The SD module has to be configured by the SD Consultant enabling the Bill of Services into the Sales Documents. SD Documents include Sales Inquiry, Sales Quotation and Sales Order. The tendering process can be applied on any of these documents but it’s logical to do it on the Sales Quotation document. On this document, we would be able to list the BOQ Items using the Bill of Services in the “Services” tab in the line item. We simply create a material master and we call it Project. This material should have some SD related settings such as Item Category and Item Group allowing the Bill of Services to be activated for this material. Accordingly, we find a special screen allowing us the build and Outline Path or Levels to design the BOQ as per the Tender BOQ booklet. After creating these BOQ Items, we would be able to cost each BOQ item in terms of materials, labor, machinery and any other overheads needed to deliver the works. This is viable by using the beautiful functionality of the Easy Cost Planning (ECP). This tool is common and well known by Controlling Consultants because this is the same tool used in other modules and areas such as Complex Production Orders, Internal Orders, and Projects Costing in SAP. In this tool, the system retrieves the labor hour cost, material average/standard cost, and machinery usage rates automatically from the system due to Integration capabilities inherent in SAP. Yet, the costing sheet in the ECP allows for modifying cost rates manually knowing that cost rates will become the basis for prices quoted in the future; so, market conditions, fluctuations and forecasts are to be considered during costing and pricing for project works.
When the estimator is done with the costing, he may proceed with pricing based on the outcomes and management input. Copying and maintaining multiple costing versions are possible to be compared and reviewed by the management for optimum decision making. The system then carries the total aggregated costs and prices to the SD pricing procedure on the SD Document level. Accordingly, we get to know the expected profit margin from the project.
SAP Vs. CANDY
It’s quite common among Estimators that we find them using a software called “Candy”. Frankly speaking, the software is highly specialized in Project Estimation with user friendly and critical functionalities made available. An expert would easily notice that ECP and the BOS functionalities in SAP are not equalizing those of Candy’s especially in the formulas normalizing, pricing and printing functionalities. Generally, it’s unfair to compare a specialized software in one area such as Candy or Primavera with a holistic ERP system. So, the solution design would be either combining Candy and SAP while using Candy for Project Estimation and SAP to be used during the Project Execution phase, or we may make a heavy ABAP intervention by which such functionalities would be possible. A third possible solution would be exporting the Project Estimation from Candy and upload it into SAP. The reason for this direction is because we are dealing with hundreds of pages with detailed lines of project BOQs that need to be created as Bill of Services classified properly exactly as per the tender documents. Bear in mind that the contractor is required to respond to the tender with the exact format or layout. Perhaps, a better decision would be either SAP acquiring Candy and, in this case, SAP would include this product as an add-on to its EC&O portfolio or SAP partners up with the software manufacturer to build an interface between both products such as the SAP Project Connector for Primavera.
The reader should be aware that there are recent SAP products such as Commercial Project Management that give more extra features and functionalities than those of the ERP that would cover most of the business requirements to a great extent. Yet, my focus is on the SAP ERP specifically since the tendering process becomes the phase that determine all the coming phases.
TYPES OF PROJECT CONTRACTS
1- Unit Re-measurable | Service Entry Sheets > Debit Memos > T&M Billing
2- Milestone | Billing Plan > Progressive Invoice
To be continued in Part 2. I will be waiting for your feedback on Part 1 and how far you are finding this article useful before publishing Part 2. Thanks.