Effective Management of Subcontracting in Engineering and Construction Industry

Global Sponsor

Effective Management of Subcontracting in Engineering and Construction Industry

September 29th, 201411:45 AM – 12:30 PM

2 Copyright © 2014 Deloitte Development LLC. All rights reserved.

Kalyan BendapudiConsultantDeloitte Consulting LLP

Deloitte Consulting practitioner with close to 10 years of consulting, implementation and support experience in EBS. Certified Oracle Projects Implementation Specialist.

Kuldeep SharmaSpecialist MasterDeloitte Consulting LLP

Deloitte Consulting practitioner with 10 years of consulting, implementation and support experience. Certified Project Management Professional.

Craig LarsonE&C Industry LeaderOracle Corporation

Civil Engineer with over 15 years of industry experience and has been with Oracle for over 17 years supporting the Engineering and Construction industry.

Team


Contents

Introduction

Overview of Procurement in E&C Industry

Why Subcontracting?

Subcontracting Challenges

Enhancements to Subcontracting Process

Business Benefits

Business Process

High level Solution

Integration Details

Q&A


Introduction

In today's competitive environment, organizations are trying to develop their competitive edge by concentrating on specifics rather than trying to master all the skills. This has led to sub-contracting. When the organizations engage a contractor to complete the project, contracting firms face the challenges in providing the resources with required expertise in all the areas. So they will subcontract part of the project work to another contracting firm. Subcontracting involves complex payment terms.

This session discusses the integration between Oracle Purchasing, Payables and Projects, and an approach to enable the complex payment terms for effective management of sub-contractors.

This presentation should not be interpreted as a representation about or endorsement of any third party products, including Oracle software.


Overview of Procurement in the E&C Industry

Common procurement application platform for multiple purchase types

Bulk Commodities such as Rebar, Concrete, Lumber etc.

Engineered Equipment such as Compressors, Pumps, Boilers etc.

Catalogue items such as flanges, brackets, bolts etc.

Subcontract Services such as Consulting, Electrical Work, Piping work etc.

Rentals such as Cranes, Containers, Bulldozers etc.


Why Subcontracting?

Specialized Services

In today’s world, engineering and construction projects are so specialized in terms of technology, size, specifications and complexity that no one firm can deliver the complete project. Therefore, contractors subcontract work to subcontracting firms with specialization in niche areas to deliver the projects.

Cost ReductionIn many situations it is more beneficial to subcontract the work because of uncertainty and fluctuations in workload, and higher administrative overhead costs.

Business ModelIn some situations, the business model of the company is subcontracting. These organizations always use subcontractors to deliver the contractual work.

Improved EfficiencySubcontracting the work to a specialized firm may also result in gain in efficiency due to expertise of subcontracting firm in executing similar projects again and again.

Risk SharingDepending on type of contract and work involved, it may make more sense to subcontract the work and share the risk related to delivery of project.


Typical Subcontracting Process flow

Typically used for construction or related services

Involves a lot of collaboration between all parties

Complex contractual terms and conditions

Complex payment controls

VendorPrequalifications RFQ

BidAnalysis/

Award

PaymentApplication

PaymentControls

PayablesAccounting

Reporting

Change/Document Management

CustomerInvoices


Subcontracting Challenges

Quality of Work

Schedule Management

Supplier Payment Controls

Technology Constraints

Subcontractor Qualification

The work may not be executed at the level of quality which principal company wants the subcontracting firm to do.

Controlling the project timelines and scope of work between subcontractors may be a challenge for the principal company.

Control the payment to subcontractor based on deliverables from subcontractor and payment from customer.

Existing technology may not be able to support the integrated process between purchasing, payables and projects.

Verifying and tracking subcontractor qualification may be a challenge due to geography, skills and work assignments.


Enhancements to Subcontracting Process

Put your subcontractor invoices automatically on hold until related customer invoices get paid. This can prevent payment to subcontractor without payment from customer.

Pay When PaidPut payment automatically on hold for overdue deliverables. This can prevent overpayment to suppliers resulting from payment before project deliverables are received.

Payment on hold

Provide control to project managers to record receipt of contractual deliverables manually to control disbursement to contractors.

Improved Supplier Payment

Payable Receivable

Purchasing

Centralized Project

Controls


Business Benefits

One integrated process from purchasing to payables to projects and receivables provide project managers with information and tools to manage subcontractors in an efficient way.

Pay when paid enhancement provide necessary controls on supplier payments and integrate it with customer payments automatically.

Payments can be put on hold automatically for overdue deliverables. This will prevent overpayment to suppliers resulting from payments before project deliverables are received.

Improved Supplier Payment Controls provide project managers to record receipt of contractual deliverables manually to control disbursement to contractors.

Project manager can put invoices on hold as well as release invoices manually.

One integrated process

Pay when paid enhancement

Improved supplier payment controls

Centralized project controls


Business Benefits – Contd..

Lower cost for the client and higher profits for the contractor

Protects contractors’ profit margin, improving quality of the project deliverables

Reduce occurrences of contractual disputes

Improves project schedule and budget management

Improves overall client satisfaction


Business Process

The project/contract manager negotiates the terms and conditions of the subcontract. As work is performed, the subcontractor organization submits applications for payment The approved work confirmations are placed on hold in line with the Pay when Paid

subcontract clause. The project accountant/billing administrator distributes and adjusts costs, reviews

expenditures, milestones and deliverables for billing eligibility, then generates the owner invoices and revenue.

In some cases, a link between the subcontractor applications for payment, and the corresponding owner invoices, may be made.

The owner organization processes the invoice and pays the general contractor. Upon receipt of the payment, the billing administrator applies the amounts to the owner invoices.

The project manager reviews the payment applied to the owner invoice and determines the list of subcontractor applications for payment to be removed from hold, and approves them.

The Payables organization can now process the subcontractor invoices that have been released and issue payment to the subcontractor as appropriate.

Project Manager

One Integrated Process

Buyer SubcontractorSupplier Customer


High level Solution

ProjectManager

Projects ReceivablesPurchasing Payables

Negotiate and create contract with pay when paid terms

Payments to Invoices

Receive notification when payment application is done

Buyer

Payables Manager

Project Manager

Billing Administrator

Apply cash receipts to receivable invoices

Place invoices on hold for overdue deliverables

System

Interface contractor invoices to projects

Generate draft receivables invoice

Interface draft invoices to receivables

Release hold from contractor invoices

Add/ update deliverables

Mark deliverables as complete or overduePut invoices on holdRelease invoice holds


Implementation Considerations

Pay When Paid LOV is displayed on PO for given site or operating unit based on PA: Pay When Paid profile option.



Automatic release of Pay When Paid invoices enables to release ‘Pay When Paid’ hold on vendor invoices when the customer invoices are paid.



Pay When Paid invoices will be automatically released when customer invoices are paid.


Manage Complex Terms and Conditions

Select Pay When Paid as ‘Yes’ to create automatic hold on PO matched invoices.


Pay Item for Subcontractor


Subcontractor Deliverables


Collaborate with Subcontractor


Invoice on hold with Pay When Paid

Subcontractor can not be paid until the customer pays.


Invoices on Pay When Paid hold


Customer Invoices


Receipt Application for Customer Invoice


Customer Invoices and Vendor Invoices


Vendor Invoices with Hold being Released


Paid Vendor Invoices


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Documents

Effective Management of Subcontracting in Engineering and Construction Industry