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ORACLE APPLICATIONS WHITE PAPER PROCESSING COMPLEX PURCHASE ORDERS AND RETAINAGE IN PAYABLES MARCH 2009

Contributors: Versions:

Cheryl Riniker, AP Center of Expertise 1 March, 2009

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Contents

Introduction..................................................................................................................................3 Objective...............................................................................................................................3 Scope.....................................................................................................................................3 Background...........................................................................................................................3 Terms.....................................................................................................................................3 Processing Complex Purchase Orders and Retainage in Payables...............................................5 Overview...............................................................................................................................5 Set Up Steps for Complex Purchase Orders and Retainage..................................................5 Additional Required Set-Up Steps for Complex Purchase Orders and Retainage................6 Entering a Complex PO ........................................................................................................7 Entering Advances..............................................................................................................10 Entering Progress Payments................................................................................................12 Entering Retainage Release Invoices..................................................................................14 Fixed Price Contract Calculation Example................................................................................16 Technical Information................................................................................................................17 Information Sources...................................................................................................................18

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Introduction
Objective
To provide an overview of the Complex Purchase Order and Retainage feature from the Payables perspective with the hopes of giving the reader a good understanding of the feature, the setups, how to enter advances, progress payments, and retainage amounts.

Scope
This paper will cover the functional side of processing complex purchase orders and retainage in payables and discuss some of the options and their impact.

Background
The ability to enter complex purchase orders and retain portions of the purchase order until a particular milestone is met is a new feature in R12.

Terms
Advance: Generally a one-time prepayment made before work on the contract begins while contract financing infuses money to the supplier as work progresses. Retainage: The common practice of withholding a fixed amount / percentage of payment until all work under a contract is complete and accepted. The retainage terms are agreed upon by the buyer and supplier and are intended to make sure that the supplier finishes the work as per the contract. Retainage is also called retention or contractual withholds. At the end of the project or when agreed events have occurred, the supplier will request the amount retained and payment will be made to release it. Retainage Rate: Rate applied to Invoices, which determines the fraction of the Invoice amount that is withheld from payment. Recoupment: Liquidation of previous financing payments from payments made for the delivery of services. Recoupment Rate: Rate applied to Invoices that determines the fraction of the Invoice amount used towards recoupment of previous financing payments. Progress Payments: Invoices representing progress are matched to the purchase order, updating the purchase order with the progress and paying for the work done. Progress Payment Schedule: Represents a schedule of services and work with associated payments Progress Payment Rate: Used on a Cost Reimbursement Contract. This represents the rate at which costs incurred by the Contractor are reimbursed. Contract Financing: Typically used in Public Sector Contracts. Contract financing is paid based on work performed or cost to date. If the contractually specified performance or cost milestones are met, financing is given to aid in the completion of subsequent work. Pay Item: Refers to a specific work/service component of the Progress Payment Schedule, and its associated payment amount Financing Complex Work Case: In this case, pay items are actually loans given at various stages that are later recouped when invoices are made. Financing payments are any payments that are
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made before final acceptance of work or products. A Progress Payment Rate is applicable only in this case. In this case, the total amount of pay Items can be less than or equal to the line amount. Retainage is not withheld on Progress Invoices Treated as Contract Financing it is withheld from the delivery of the goods or services. Actual Complex Work Case: In this case, pay items are actual invoices. Here, payments are for accepted supplies or services, including payments for accepted partial deliveries. This type of contract can have Advances. In this case, the total amount of pay Items should be equal to the line amount.

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Processing Complex Purchase Orders and Retainage in Payables


Overview
Complex payment terms and conditions for fixed price contracts can be captured during the procurement contract flow. This includes options for progress payments, advances and contract financing, and retainage. These terms and conditions are supported in Oracle Payables when recording invoices and managing payment execution during the lifetime of the contract. Seamless and real time status of the purchasing contract, progress, financing and advances balances, retainage and retainage release is provided to both Oracle Payables and Purchasing users.

Set Up Steps for Complex Purchase Orders and Retainage


There are two setups steps that are required if the complex purchase orders and retainage feature will be used. 1. Create a document style in Oracle Purchasing. Responsibility: Purchasing Navigation: / Setup / Purchasing / Document Styles Create Define whether the complex PO can include advances, retainage, and progress payments.

Pay Items can be Milestone, Rate, or Lump Sum. For Fixed Price Services, rate based pay items will be considered quantity based matches and milestone and lumpsum will be considered amount-based matches when evaluating billed, planned, and tolerances. Milestone pay items are based on a milestone in the contract or event that needs to be fully complete before the contractor can claim the associated payment. Rate pay items are based on a Rate of work completion. Payments for these can be claimed as units of work are completed.
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Lump Sum pay items, as the name suggests, are based on a Lump Sum amount allocated to a portion of work. Progress payments can be released for these pay items based on the level of completion. If the Treat Progress Payments as Contract Financing option is selected, then pay items entered follow the Financing Complex Work case. If the option is not selected, then pay items follow the Actual Complex Work case. Note: The profile option POR: Amount Based Services Line Type specifies how services are to be quantified and ordered on the transaction document. In order to use the Complex Services functionality, the value for this profile option should be set to Fixed Price Services, which means that services will be ordered as an amount. This setup is found performed in the System Administrator responsibility under System Profiles. 2. Create a retainage account in Financials Options setup. Responsibility: Payables Navigation: / Setup / Options / Financials Options Enter the retainage account to use during accounting.

Note: Historically the prepayment account entered here would default to the supplier site and be used when creating prepayments for the supplier. However, the new Advances and Contract Financing prepayments introduced with this solution will use the distribution account on the Purchase Order and not the supplier site.

Additional Required Set-Up Steps for Complex Purchase Orders and Retainage
In addition to the two set-up steps required to enter a complex purchase order and use the retainage option, there are three other set-up steps that impact how the POs and Invoices are processed. 1. 2. Define matching tolerances in the Invoice Tolerances Template Specify supplier terms and controls in the supplier setup
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3.

Define approval rules in Oracle Approvals Management

Entering a Complex PO
Because this document focuses on entering data in Payables, this section will only discuss the basic steps to enter a complex PO. Complex purchase orders can only be entered through the Buyer Work Center navigation. 1. Create a procurement purchase order in Oracle Purchasing. Responsibility: Purchasing Navigation: / Buyer Work Center / Orders Select the complex PO document style in the Create drop down box or select More to find the complex PO document style if it is not listed in the LOV.

2. Enter the Purchase Order header information and enter the line details.

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3. After entering the line, select the Update icon to enter the Financing Options

4. Enter additional the pay items for which a payment should be made.

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5. Enter the distributions. The advance to be paid will show on distributions.

6. Save and Approve the PO

Entering Advances
Advances can be entered through the invoice workbench or through the quick invoices form as prepayment type invoices that are matched to a purchase order. Self Service Entry has been expanded to support searching and selecting Advances and Financing rows when submitting Matched invoices. This document will show entering an advance through the invoice workbench. Create a prepayment invoice in Oracle Payables. Responsibility: Payables Navigation: / Invoices / Entry / Invoices 1. Select Prepayment type invoice, and enter the PO number.

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2. Either enter the Prepayment line directly in the lines tab or use the Matching window to first review possible choices before selecting one to match to.

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Once an Advance is approved and paid, the status will be updated to Available. It will be a combination of this status and the settlement date that will determine when the prepayment is ready for automatic recoupment on progress invoices.

Entering Progress Payments


Progress payments can be entered through Quick Invoices, Invoice Entry in the Invoice Workbench, the Pay on Receipt Import process from Purchasing, the Payables Invoice Import process, or initiated as a payment request from iSupplier. The example in this document will show entering a progress payment from the invoice workbench. Create an invoice in Oracle Payables. Responsibility: Payables Navigation: / Invoices / Entry / Invoices 1. Select Standard type invoice and enter basic header information, along with the PO to match. 2. Select the Match button, and match to the PO

3. The retainage amount is calculated (in this example, 10% of $3000 or $300).

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4. On the next progress payment, which is also for $3000.00, the retainage will be only $500 because that was the maximum retainage amount defined in the financing options.

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Entering Retainage Release Invoices


Retainage Release invoices can only be entered by the Payables Analyst through the Invoice Workbench. Create an invoice in Oracle Payables. Responsibility: Payables Navigation: / Invoices / Entry / Invoices 1. Enter invoice type Retainage Release

2. Enter the Release Amount Net of Tax.

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3. The retainage account is relieved, and the accrual account is debited the released amount.

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Fixed Price Contract Calculation Example


The recoupment amount used to offset the prepayment made is calculated based on the least value of either the invoice amount multiplied by the recoupment rate, the invoice amount less the retainage amount, or the prepayment amount less any other recoupment amounts.
PO Amount: Prepayment Amount: Recoupment Rate: Retainage Rate: Invoice Line Amount: Retainage: Recoupment: $100.00 $ 40.00 80% 15% $10.00 -$1.50 -$8.00 ($10 x 15%) Least of: $10.00 x 80% = $ 8.00 Line Item Amount $10.00 1.50 = $ 8.50 Amount due after retainage $40.00 0 = $40.00 Remaining Prepaid Amount

====== $ 0.50 Invoice Line Amount: Retainage: Recoupment: $60.00 -$9.00 ($60 x 15%) $-32.00 Least of: $60.00 x 80% = $48.00 Line Item Amount $60.00 $9.00 = $51.00 Amount due after retainage $40.00 $8.00 = $32.00 Remaining Prepaid Amount ======= $19.00

Invoice Line Amount: Retainage: Recoupment:

$30.00 -$4.50 ($30 x 15%) -$0.00 Least of: $30.00 x 80% = $24.00 Line Item Amount $30.00 $9.00 = $25.50 Amount due after retainage $40.00 $40.00 = $ 0.00 Remaining Prepaid Amount ======= $25.50

PO Amount: $100.00 Prepayment Amount: $-40.00 Payments Retainage: $-45.00 ======= Retainage Amount Due: $ 15.00

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Technical Information
The following files are relevant to the Complex PO/Retainage feature. AP_RETAINAGE_RELEASE_PKG (apcwrelb.pls)

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Information Sources

Oracle Payables User Guide, Release 12, Part No. B25454-04 - Advances and Progressive Contract Financing Oracle Purchasing User Guide, Release 12, Part No. B28669-01 - Entering Complex Work Purchase Order Lines - Complex Work in the Procurement Suite (Appendix G) Oracle iSupplier Portal User Guide, Release 12, Part No. B31601-01 Note 396256.1: FAQ Procurement Services in Release 12 Note 560323.1: How to Setup Document Sequence Category for Retainage Release Type Invoices

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