A SAP model to support Alliance projects
This blog will, in 1000 words or so, attempt to explain how the alliance contracting model can be supported by SAP. A brief history and explanation of alliancing will be followed by a description of an SAP ERP solution to support the transactional and reporting requirements of a Non-Owning Party (NOP) in an alliance contract. The solution will support the ability of the NOP to do easy auditing of claimed costs, accounting for all transactions during the alliance contract and report on all categories of cost, mark-up, revenue and risk.
The alliancing concept has been used in Australia for more than a decade. The Alliance contracting model is selected to reduce project costs and delivery timelines. The contract is constructed to encourage collaboration between the Owner and the various NOP’s responsible for delivering the project. The claimed benefits realised during an alliance contract are an increase in the value for money gained by the Owner Party (OP). Two key features of an alliance contract are: firstly defining and recording which costs are recovered from the OP and, secondly the performance criterion which needs to be met for the NOP to access project profits. These features are best represented by a diagram from the Victorian Dep. of Finance and Treasury’s Complete Project Alliance Guide document.
As can be seen in the diagram above, there are a number of costs that have to be recoded in this model: Total Outrun Costs (TOC), the costs that make up Limb 1, Limb 2 and Limb 3 and the question is then: how are these easily tracked in SAP to ensure that your business maintains profitability during the alliance. The SAP functionality that I propose you use for this is discussed below:
On a transactional basis the ‘incoming costs’ which need to be recorded on the project will be from payroll, overhead (usually via a cost centre and will include management and other corporate overhead), project specific expenses and the cost of sub-contractors; other cost types can be added if needed for specific contracting agreements. These costs will flow through the project, which is registered in SAP, and then billed to the customer.
Allocation of actual payroll costs to the project: Allocation of actual costs to project after period end and after all award interpretation has been done is performed directly from the payroll run. These costs will include overtime and other variable costs.
Ability to record different cost types on the project: Configuration so that all cost categories are recorded automatically on the project and differentiated based on the cost type (the cost element in SAP). The cost type will not be determined by the user but is determined by the transaction being executed. When payroll runs the costs will post to the project against the correct cost element without user intervention, the same applies to goods receipts, timesheets, etc. So just by doing the transactions correctly the integrity of project costing and alliance reporting is maintained.
Billing the OP the correct costs: Since all costs are allocated to the correct projects against the correct cost element (cost category) SAP has all the information needed to determine whether to bill these costs or not. For example payroll costs and management overheads are on different cost elements so when I do the billing run SAP will bill the payroll costs (since they are not at risk), SAP will check whether or not the limb2 pain/gain KPA have been met and bill the overheads and/or normal profits depending on the alliance contract agreement. At time of billing SAP will check the NOP’s entitlement to limb3 profit and bill this if necessary.
Accounting for ‘at risk’ profit: Until the project is completed there is usually a portion of the profit that is ‘at risk’ and which may need to be paid back to the OP. SAP’s Results Analysis (RA) functionality is used to post ‘at risk’ profit to an accrual account, which is released to profit once all KPA have been signed of.
It’s my view that SAP is able to give an easy-to-use, accurate and integrated solution to supporting alliance contracts. Implementing the functionality described above will enable the NOP to keep real time track of all costs on the project and continually assess the costs against the contracted alliance agreement. All costs are recorded and can be reported on after the project is complete and can be used to improve the determination of total outrun costs for future projects. The reporting is also useful to define the fee percentage on future projects.
Good reference documents are Philip Greenham from Minter Elison’s Alliancing: A glimpse of the real world view, 2007 (http://www.xyz.au.com/members/intelligence/pdf_files/Allianci_Paper.pdf ) and the documents on the Victorian Dept. of Treasury and Finance website (http://www.dtf.vic.gov.au/CA25713E0002EF43/pages/project-alliancing)