Establishing a coherent solution design in SAP ERP to serve the EC&O Business Firms (Part 2)
Greetings everyone. Thanks for your comments on part 1 of this article. I know you’ve been waiting for Part 2, so let’s get cracking. I also appreciate if we have more interactive discussions that can involve your notes, comments, concerns, and inquiries since this will definitely enrich the content for the reader. Now, once the project tendering phase has ended by submitting the proposal or quotation with all the Tendering documents stipulated earlier and the project gets awarded to a Contracting Company, two areas come into action simultaneously: SD and PS modules.
Lump Sum Contracts Vs. Unit Re-measurable Contracts in SD
In the SD Module, the Quotation evolves to become a Sales Order or a Sales Contract with preference to the latter since a contract in reality is formulated between the Customer and the Contractor by which they specify the conditions, contract start and end dates, billing plan or payment terms. From here we continue where we have stopped in Part 1, where we mentioned that Construction Contracts are either Lump Sum Contracts with Milestone billing or Unit Price Re-measurable. For lump sum milestone-based agreements, we normally use Billing Plans in Sales Documents by which we specify percentages or values to be billed. For example, we can a billing plan involving 30% down payment, 60% based on progress/milestones, 15% upon project completion and 5% after project completion by 400 days. It’s worth mentioning that this payment would be applied per bill or billing document. Percentages differs between projects and it all depends on agreements between parties. Payment terms are arranged in accordance with desirable cash flows that would allow smooth operations. You should be aware that a lot of materials are being procured in bulk quantities. Labor are being mobilized and perhaps outsourced if needed. Heavy equipment are either mobilized, purchased, or leased. So, many commitments are being undertaken requiring availability of financing. This is why it’s common among this industry that contractors seek bank facilities and arrangements to provide a financial supply chain for the process. I am going to demonstrate how Cash Management and Treasury & Risk Management modules are deployed to manage Cash flows. That’s beside the fact that SAP has launched recently the EXIM_MENA package that gets implemented bringing extra functionalities to manage Letters of Credit and Bank Guarantees properly via the NWBC Client and away from using the complex and unnecessary module of the GTS (Global Trade Services) module. The GTS is relevant for trading companies operating in Europe and the US where heavy controls are needed for taxes, customs, sanctions…etc.
The other type of construction contracts is known as Units Re-measurable. In this type of projects, there is no billing plan. Instead, a totally different process applies that is heavily dependent on the Bill of Services and its functionalities. When the project becomes in the Execution phase upon Project Awarding, a Sales Order or Contract is created or copied from the Quotation, that become the basis for the Service Entry Sheets. As I have illustrated in part 1, the Quantities or the BOQs are outlined in the Bill of Services with each BOQ having its required quantity in KG, Square meters, Cubic Meters, Square Feet…etc. to be delivered. With the progress in completion of these BOQs/Construction works, the contractor issues from the Sales Document known as the Service Entry Sheet (SES). The SES here is the one in the SD module not the MM module so that readers don’t get confused. The SD SES is issued by the project manager or assistant by which they physically measure and record actual findings of work completed as quantities performed.
Once the SES has been recorded and approved, the system transform the quantities performed into amounts. These amounts arrive based on the pricing made earlier on the BOS of the SD document. For example, one of the BOQs or Construction works is to deliver the Superstructure under Concrete Works in Columns, beams, upstands, and suspended slabs measured in cubic meter such as 400 m3. Assuming the contractor delivered 100 m3, he gets this actually surveyed and recorded in a Service Entry Sheet. This SES then becomes a Debit Memo. This Debit Memo sales document in SAP falls under the Sales Order category and it opens from the same tcode: VA01, VA02, or VA03. So, it’s a like a Sales Order but it’s named as Debit Memo. This document then evolves to become a Billing Document to be processed by finance as an Invoice arriving from SD. Now, it’s time for some visuals!
Simultaneously on the other side, since the project has been awarded, it’s show time for Project Management where PS module comes into the picture. The project manager in the construction company is requested to start building the project plan for the project. A project definition with WBS Element at the root level should be created in the Project Builder in the PS module. The root WBS Element is assigned to Sales Order/Sales Contract on the SD Line Item level > Assignment tab or at the header level of the Sales Document. Two things that you should know in this stage:
- The BOQs or the Bills of Services and its structure in the tendering documents are NOT RELEVANT to the Project Plan and the way it is designed. Construction Projects are organized in different manner. In the PS Module, in the famous Project Builder, the Project Structure is broken down into phases, buildings and floors. Each is broken down into a sequence of organized activities in a logical form such as Superstructure and Substructure should be built first before the MEP works (Mechanical, Electrical, Plumbing) take place. In brief, BOQs does not represent WBS Elements because they are not aligned with each other. For instance, Concrete works will be needed in all buildings and floors. The BOQs involves delivering materials, labor and machinary in quantities serving the Project’s different phases.
- The Project Estimation/Planning process done during the Tendering Phase is NOT the Project Planning process done at the beginning of the execution phase. One reason for this is the same idea of point 1. Another compelling reason is that the Estimation and Pricing team are different from the Project Management team. As a matter of fact, the Pricing team will not disclose or share with the Project Management team the detailed Costing Analysis with the Project Management team and the PM team will be asked to develop its own project plan and cost analysis. In some instances, the management will normally give a direction to the PM on a specific cost budget for the project by which the PM has to match so that they maintain an acceptable profit margin adopted by the management. The project planned costs developed by the PM team might show shortages of surpluses but should not exceed the budget.
BOQs are not WBSs. They are structured differently.
Project Planning and Estimation for Tendering is NOT the same Project Planning for Execution
Despite the fact that the above mostly applies in the EC&O industry, there are always exceptions. In occasions where internal projects are being executed between divisions operating under the same company, it’s possible to have the Bill of Services aligned with WBS Structure. This may also apply for other industries such as complex manufacturing where SD and PS are aligned to a great extent. Having that said, SAP has provided a superb functionality that allows merging the ECP (Easy Cost Planning) done on the Sales Document earlier during estimation with the ECP done later on the Project WBS Costing. It’s called SD BOS Transfer to PS. It’s one of those beauties in SAP. I fell in love with that program and its capabilities. Let me show you some screenshots to get what I mean.
As mentioned before in Part 1, the Easy Cost Planning tool allows the estimator or the planner to detail all the planned costs in terms of materials, labor, machinery and overheads needed to deliver the project. We have the same ECP tool in Project WBS Costing same as the one in SD BOS. Given that we have two types of contracts, each one has its own sequence of processes. These processes are given below:
Costing Models, Templates, Base Planning Objects & SD Copying Function
Now, since planning is happening during both tendering and project planning phase or in different stages and for similar projects, it’s highly advisable to use Costing Models and Base Planning Objects for Construction Works that act as templates to be reused for any future project or phase with similar activities. These templates become real catalysts in speeding up the cost planning for projects. You may retrieve these models or templates during planning and the planner may change quantities and/or prices or add additional cost items based on the project’s requirements. In addition, the copying function in Sales Documents allow the user to copy Bill of Services and East Cost Planning from previous Sales Orders and Contracts. This will significantly reduce the time and efforts needed to create the BOQs in SAP along with their Costing even though projects Bill of Quantities are not exactly the same. After all, deleting or modifying lines are way easier than creating new ones. I will give an example below using a tool known as Ad Hoc Cost Estimate which is a template of costs related any specific project works such as MEP, Excavation and Concrete Works. Once we have an Ad Hoc Cost Estimate, you can use it for Costing purposes for any similar project while you have the ability to modify it.
If we are dealing with Internal Order, Project, Sales Order Costing via Easy Cost Planning, we can create a cost estimate that can be copied from an existing template of an Ad Hoc Cost Estimate. Easy Cost Planning also can be used later during Execution Phase by using the same costing sheet with an Execution Profile as per the configuration that can Issue Purchase Requisitions, Purchase Orders, Goods Issue, and Activity Confirmation from the same sheet.
Project System (PS) Module in Action
Simultaneously, in the Project System, the project planner creates his/her detailed project plan. Some would be confused between the classical detailed planning done on directly on the Project Structure in the Project Builder with the other tool of the Easy Cost Planning. These are certainly different planning tools and we usually prefer the ECP during the Estimation or tendering phase for pricing and budgeting purposes. But, we may use the classical Detailed Planning during project execution. The system allows the use of both types on different versions. I will outline the difference between both ways of Cost Planning as well as their PROS and CONS. After planning, the plan can be transferred on the system to become the budget. There’s a special program that carries the plan to become the budget. I will discuss this topic further on Part 3 InshaAllah.