Aiming to support a lean Engineer to Order (ETO) process, Enterprise Portfolio and Project Management in SAP S/4HANA Cloud provides a functionality to manage rapidly growing customized product base and synchronize supply chain to set up, execute and manage projects for the cost and revenue collection. The project financial controllers benefit from real time, integrated financial data to monitor the project performance.
This blog will address the sales order integration with commercial projects run by product and asset centric companies for lean ETO projects: The key features include the following:
- Ease project performance tracking by enabling the match of revenues and costs on market segments
- Support complex hierarchical project accounting scenarios through multiple billing elements within a project
- Support fixed-price billing with down payment and free of charge processes through the account assignment of sales order items to projects for selected use cases.
- Reduce manual effort with real-time automatic revenue recognition postings during the period using the cost-based percentage of completion or completed contract methods.
- Easy adoption which leads to reduced effort in process implementation.
In this business scenario, a Billing Element is assigned to a sales order item to capture the costs and revenues of a sales order item. A billing element is a project structure element against which a revenue can be planned and posted. It can either be a project or a WBS element.
Project Account Assignment to one or multiple Sales Order
Project account assignment to sales order enables the direct flow of revenues to the project during the billing and the costs of the goods issue from material deliveries (stock, non-stock materials or services). Therefore, the project can be a cost and revenue collector which enables the profitability analysis at project level.
In addition, costs can also be booked on a project with other transactions such as time sheet, activity allocation, supplier invoice, goods receipt to supplier invoice, post general journal entry or goods issue from stock. Overhead surcharges can also be posted on the project.
In the first part of the process, a commercial project is set up using the Project Control app with the Project profile ‘Project with Revenue’. This allows the revenue to flow directly to the project. During the project setup, the user can decide to set one or more WBS Elements as Billing Element.
To set the billing element flag for an existing WBS element or to shift an existing WBS element to subtree of a billing element, the project and the WBS element must be in Created status. However, the billing element is editable for newly added WBS elements before the first save in projects with Partially Released or Released status.
For more information on project status, refer to Processing Status for Projects and WBS Elements.
In parallel other project information, like milestones, team members, manual planning of costs and revenues, budget etc., can be set. The internal sales accountant can create a sales order with sales order items and account assign the Billing Element to a sales order item. Each line item of a sales order is linked to a billing element in the project structure.
Additionally, in sales documents, you can assign these WBS elements from the projects to other sales document items like:
- Sales orders
- Customer returns
- Sales orders without charge
- Credit memo requests
- Debit memo requests
As a prerequisite on projects, the planned costs and planned revenue is maintained. To ensure correct revenue recognition postings and profitability segment derivation, a billing element can be account assigned to the sales order items for a specific group of item categories relevant for pricing and Free of Charge goods (100% discount) as mentioned in the table below:
Note: In general, you cannot assign a WBS element that is already assigned to an item of any of these categories to another item of these categories. The only exceptions are WBS elements from projects that are set up to support multiple sales order items. In this case, you can assign the same WBS element to more than one sales order item. Prerequisite is that any items for which you want to use a WBS element that has already been assigned to another item determine the same results analysis key (RA key) that is derived from the first sales order item. This key is used in cost controlling.
Basically, there is a 1:1 relationship between the billing element and the sales order item and 1:n relationship between the billing element and the sales order item which means that the same billing work package can be assigned to multiple free of charge sales order items and, if needed, one billing and pricing relevant sales order item from the above list. The below example gives you a visual representation of project structure with multiple billing elements at different structure levels.
For the leading sales order item, the revenue recognition key ‘Cost based POC’ is derived. Leading sales order item and revenue recognition key is always coupled. The key is stored on billing element of the project. Currently, the following revenue recognition keys are available:
- Cost-Based Percentage-of-Completion Method (EPMFC)
Revenue is calculated on cost-based percentage of completion and recognized at time of posting goods issues for deliveries from the sales orders or with any other business transaction posting costs on the project such as time confirmation.
- Completed Contract Method (EPMCC)
Revenue and cost are deferred during the lifetime of a project and recognized when the status of the project is completed.
- No Revenue Recognition Method (EPMNC)
Revenue and cost are recognized as occurred for projects.
For 1:1 case, the billing element assigned to a billing and pricing relevant sales order item is called the Leading Sales Order item. The leading sales order item determines the revenue recognition method and profitability segment.
- The revenue recognition method based on the one chosen by the user for certain item category or material. The SSCUI to maintain the recognition keys for projects is “Derivation of Recognition Key for Projects” (ID102517).
- The profitability segment data can be automatically derived from the leading sales order item.
Project Execution & Revenue Calculation
As soon as the project is released, the execution phase begins. The actual costs like time recording, General Ledger postings, activity allocation or delivery costs; and revenues flowing through the sales order billing process will be posted against the project.
In the sales order, the save can trigger either of the two processes based on the material settings in the material master for the requirement class:
- In the Make-to-Order process, the production starts with the creation of planned orders and ends with posting of goods receipt for the production order. The production costs will be available in projects after the delivery is created and goods issue for the product is posted.Note: The costs here will be taken from the sales order stock valuation and the eventual production order variances will not be reflected on the project. The production order variances can be reflected on the project only if they are manually settled to the project.
- The costs created by posting the goods issue or any other actual cost posting on the project, lead to two entries in the General Ledger. The first entry is the actual cost posting and the second entry is for the revenue recognition posting which realizes the revenue, and activates the work in progress (WIP) or accrued revenue.
The following image gives you a brief overview of how a revenue planning in a project is performed via a Sales Order by entering the revenue values against a Sales Order Line Item that is assigned to a billing element.
Billing is the next important step in the process. The item categories whitelisted allow a billing plan set at each sales order item level. Based on the dates in the billing plan, billing can be performed by the Billing Clerk. Unlike the delivery-based billing item categories, for these sales order item categories the billing can take place even before the goods issue.
With billing, two journal entries are created (in the situation that EPMFC is derived):
- The journal entry for the billing document
- The revenue recognition journal entry that defers the billed revenue and posts on deferred revenue.
Note: The period-end runs a net of the balance sheet accounts for accrued revenues and deferred revenues. Event-Based Revenue Recognition is incorporated into the Universal Journal and therefore no reconciliation is required. Moreover, this can provide parallel currencies and the valuation by different ledgers, respectively accounting principles (in our example we select leading ledger 0L). Also, there is a link of the revenue recognition document to the referenced prima nota, which simplifies traceability together with the profitability attributes like customer and product sold.
If the project is in Completed status, then no revenue recognition is posted, but it is possible to post the delivery on the project. If you close the project, the GI of the delivery will not be possible and the user gets an error message. On project completion, finance clears all the balance sheet values.
Note: In the scenario, in which costs are posted on a project before assignment of a leading sales order item, you need to run the profitability realignment after sales order item assignment to update the already posted journal entries with the market segment information. The next revenue recognition run will take all the postings in account and apply up-to-date revenue recognition data.
Lastly, another type of commercial projects supported by EPPM in S4HC are professional services automation. These are the projects run by consultancy, audit and tax companies. The scope of this functionality enables the efficient run of customer projects based on high automation. This is described in the blog.