Effective Management of Subcontracting in Engineering and Construction Industry

1. Effective Management of Subcontracting in Engineering and Construction Industry September 29th, 2014 11:45 AM – 12:30 PM

2. 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 Contents

3. 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.

4. Team Kalyan Bendapudi Consultant Deloitte Consulting LLP Deloitte Consulting practitioner with close to 10 years of consulting, implementation and support experience in EBS. Certified Oracle Projects Implementation Specialist. Kuldeep Sharma Specialist Master Deloitte Consulting LLP Deloitte Consulting practitioner with 10 years of consulting, implementation and support experience. Certified Project Management Professional. • Craig Larson • E&C Industry Leader • Oracle 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.

5. 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. Subcontract Services such as Consulting, Electrical Work, Piping work etc. Catalogue items such as flanges, brackets, bolts etc. Rentals such as Cranes, Containers, Bulldozers etc.

6. Why Subcontracting? 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. Specialized Services Cost Reduction Improved Efficiency In many situations it is more beneficial to subcontract the work because of uncertainty and fluctuations in workload, and higher administrative overhead costs. Subcontracting 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. Business Model Risk Sharing In some situations, the business model of the company is subcontracting. These organizations always use subcontractors to deliver the contractual work. Depending 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.

7. VendorPrequalifications RFQ BidAnalysis/Award PaymentApplication PaymentControls PayablesAccounting Typical Subcontracting Process flow Reporting CustomerInvoices Change/DocumentManagement • Typically used for construction or related services • Involves a lot of collaboration between all parties • Complex contractual terms and conditions • Complex payment controls

8. Subcontracting Challenges The work may not be executed at the level of quality which principal company wants the subcontracting firm to do. Quality of Work Controlling the project timelines and scope of work between subcontractorsmay be a challenge for the principal company. Schedule Management Control the payment to suppliers based on deliverables from subcontractor and payment from customer. Supplier Payment Controls Existing technology may not be able to support the integrated process between purchasing, payables and projects. Technology Constraints Verifying and tracking subcontractor qualification may be a challenge due to geography, skills and work assignments. Subcontractor Qualification

9. Enhancements to Subcontracting Process Pay When Paid • Payment on hold Put your supplier invoices automatically on hold until related customer invoices get paid. This can prevent payment to subcontractor without payment from customer. Put payment automatically on hold for overdue deliverables. This can prevent overpayment to suppliers resulting from payment before project deliverables are received. Purchasing Centralized Project Controls Payable Receivable • Improved Supplier Payment Provide control to project managers to record receipt of contractual deliverables manually to control disbursement to contractors.

10. 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

11. 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

12. 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. One Integrated Process Project Manager Buyer Supplier Subcontractor Customer

13. High level Solution Purchasing Payables Projects Receivables Buyer Negotiate and create contractwith pay when paid terms Payables Manager Payments to Invoices System Place invoices on hold for overdue deliverables Generate draft receivables invoice Interface contractor invoices to projects Interface draft invoices to receivables Billing Administrator Apply cash receipts to receivable invoices Project Manager Receive notification when payment application is done Release hold from contractor invoices ProjectManager • Add/ update deliverables • Mark deliverables as complete or overdue • Put invoices on hold • Release invoice holds

14. Integration Details • Payables • Sourcing Place Work Confirmations on Hold Negotiate terms and conditions of contract • Projects • Receivables Apply Cash Receipts to Customer Invoices Generate Owner Invoices Interface Supplier Invoices to Projects • iSupplier Portal • Purchasing Submit Application for Payment Create Contract Release Supplier Invoice Hold Issue Payment

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

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

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

18. Manage Complex Terms and Conditions Select Pay When Paid as ‘Yes’ to create automatic hold on PO matched invoices.

19. Pay Item for Subcontractor

20. Collaborate with Subcontractor

21. Invoice on hold with Pay When Paid Subcontractor can not be paid until the customer pays.

22. Invoices on Pay When Paid hold

23. Customer Invoices

24. Receipt Application for Customer Invoice

25. Customer Invoices and Vendor Invoices

26. Vendor Invoices with Hold being Released

27. Paid Vendor Invoices

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