Projects and Contracts – Rajawali Adikarya

What Is?

The Projects and Contracts module is used for companies who need to track individual Projects and/or Contracts, broken down into a hierarchical structure. Unlike manufacturing, where basically the product comprises material and labor as the two main components and is flat in its final perspective, a project is vertically presented and is far more complex.

Generally speaking a project results from a tender put out into the market to both supply and install/erect the final product, i.e. commission it completely with everything in place ready to use.

A project may be for:

Internal work

For a customer who is in turn the main contractor for a customer

For a customer who is the end user

A project can be for as little as one month or may last years, depending upon the nature of the work. It may involve one job or many jobs, handled internally, outsourced, or a combination of both and is usually tied to one main contract. The important requirement is to measure the profit of each project on its own merit. Projects can be for standard products i.e. building standard type housing or non-standard, i.e. designing a new power station, either of which may include custom designed products or standard components/products as part of the mix.

This means that careful control and monitoring is necessary for managing the tender quantities/hrs, revenue and costs on an ongoing basis, plus any variations due to change in scope or non-compliance by suppliers or the company itself to ensure that a profit and not a loss is made for the work done.

Furthermore escalation costs and retentions from the customer or to the supplier are usually put into the project to cover and monitor any escalation value charged to the customer or from the supplier as the cost of living index rises.

Similarly it is common for customers to hold back a percentage of the sales value as a retention, until they are satisfied that the work has been completed satisfactorily, to an agreed payment date for each retention portion related to a progress billing.

Where part of the work has been outsourced to suppliers, it is also the practice to hold back portion of the payment to them until the work has been completed satisfactorily or to an agreed payment date.

Most project work is invoiced on a progress billing basis, i.e. to an agreed schedule of deliverables and invoice dates, both to the customer and from the supplier.

Because the projects may last some time, it is important that the project is broken down into reasonable and measurable deliverables, against which budgets expected revenue, costs, quantities/hrs have been pre-calculated. In this way it is possible to post actuals against each of these ‘hierarchies’ so that proper measurement and control can be applied to enable progress payments to be made throughout the duration of the project.

It is also possible to therefore measure, how the project is progressing against the original budget and projects forecast, whether there was a change in scope requiring a variation order from the customer, whether there is a problem looming that can be identified very quickly and rectified, before the costs escalate out of control.

Invoicing of progress payments does not necessarily mean that the full profit is taken immediately. Normally for large projects, the billing is posted to the balance sheet and the company determines when and how much profit will be transferred to the income statement from month to month, allowing for contingencies which might have an adverse effect on the bottom line.

Progress invoices normally reflect the total amount to be invoiced, less the invoiced amount to date and less the retention still to be paid in due course.

Often a separate accounts receivable account is opened for the retention portion, this amount being transferred out of the normal receivables account to the retention account with its due date preset for payment so as not to lose track of when these amounts are due.

Some typical projects could be as follows:

If you are an ‘events company’, each event is a project, i.e. golf, tennis, rugby etc.
If you are installing a new computer system each major discipline forms part of a project.
If you are a mine opening up a new shaft, each shaft would be a project.
If you are building a power station, the manufacturing of the parts, the installation of all materials, the erection of the power station and commissioning would be a project.
If you are a travel company organizing a tour. You would need to track incoming and outgoing deposits, actual revenue and costs per transport, food, accommodation etc.

As can be seen from these examples, they can be very short or very long term or somewhere in between.

Essentially a project comprises

Major activities
Minor activities

Each one is presented in a vertical format with quantities/hrs, costs and values spread across the page.

Sub-totals are provided for each major activity, usually tying into the budgeted and forecasted revenue and cost values and quantities/hrs for comparative purposes, together with % comparisons.

Postings are all done at the detail level and can be rolled up to provide the right level of management information, with drill down capabilities to identify in detail any problem area.

A project usually combines many jobs, e.g. manufacture of different items, installing equipment on site, laying of piping on site, erecting buildings. Each would normally comprise a unique job or series of jobs from many suppliers, liked to a hierarchical activity, i.e. material, labor, outsourced, consumables, administration, etc. The list can be short or long, depending on how important each activity is in terms of the overall revenue and cost.

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SYSPRO Solution

The Projects and Contracts system caters for progress billings, deposits and retentions. You can define schedules against which progress billings must take place and the method of billings.

For deposits, you can record the deposit when accepting the contract and when you bill the customer you can indicate what portion of the billing value should be deducted from the deposit amount.

For retentions, you specify the required retention amount as well as the retention period when creating the contract. Once the retention period is reached, you can invoice the customer and offset the retention value against the billing being made.

Additional features include:

Cost a given job at each level or section within the job
Query (or report on) the current status of a job in terms of sales (orders placed by a customer) billings (invoices raised on the customer) cost of sales of the billings and the future expected costs. This enables the establishment of the profits already taken against the job and the projected profit at the end of the job.
Designate up to five user-defined costing levels within a contract.
Assign the hierarchy of heads and sections when creating a job, where a head is the top-level section for a job.
Assign an unlimited number of heads to a contract, attach an unlimited number of sections to each head and attach an unlimited number of sections to each subsection.
Define standard hierarchies to avoid having to re-enter the entire hierarchy for every job created.
Query the total costs for a hierarchical job, including details of the head/section costs.

Process Flow

You work for a firm that enters into long term contracts with customers. Most of your contracts range from six (6) months to over one (1) year. Some of your work is repetitive and for these jobs you have standard hierarchies to help with the estimating and quotations.

Customers request that you draw up an estimate and quotation for their long term projects. Your engineers will evaluate the request and draw up an estimate either using a standard hierarchy or producing a user-defined hierarchy. The quotation will be based on the estimate and sent to the customer for acceptance.

When the customer agrees the terms and conditions of the contract you will then confirm the quotation, and take a deposit. At this stage requisitions or purchase orders, hierarchical job, sales order with deposits, retentions and billing schedules are created.

Your team will begin on the contract by purchasing any raw material that is required and receipting it directly into the hierarchical job when it comes into stores. Labor will be posted to the Hierarchical Job as necessary.

At regular intervals you will invoice the customer for work completed and receive payment.

At the end of the job the customer will hold an amount referred to as a retention for a certain period of time. When the retention period is over, and the customer is happy that the contract has been completed satisfactorily, you will invoice them and they will pay the final amount. This action then completes the cycle.

Integration

The Projects and Contracts solutions integrates to the following SYSPRO solutions:

Quotations

A hierarchical quotation is created with a non-stocked line linked to an estimate and costs distributed to either a standard or user-defined hierarchy. On quotation confirmation requisitions or purchase orders, hierarchical jobs, deposit, billing schedules and retention are created. This links the Projects and Contracts module to Purchase Orders, Sales Orders, Accounts Receivable and Work in Progress, via the Quotations module.

Work in Progress

Stocked and non-stocked hierarchical jobs can be created and linked back to a Projects and Contracts contract. Issues to Work in Progress are costed to the relevant head and section, as well as billing revenue. Hierarchical jobs for stock items link Inventory to Projects and Contracts, via Work in Progress.

Essential and Recommended Modules

Essential

Work in Progress (Jobs can be linked to hierarchies.)

Recommended
Sales Orders
Quotations
Work in Progress

Projects and Contracts Integration to other SYSPRO solutions

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