Contracts in SAP SD

Concept :

What are Contracts ?

Contracts are agreements between the Customer and Vendor to supply materials/services for a
specific price between a fixed period of time. Many possible types of contracts

exists based on the types of contracts. For example, there are maintenance contracts, service
contracts, quantity contracts, value contracts all of which we will be discussing over the course
of this article. The bottom line however remains the same – A contract is an agreement between
the Customer and vendor to supply goods/materials/services of specific quantity/value for a
specific price over a specified period. Let’s discuss the different types of contracts.

Quantity Contract

A quantity contract is an agreement to supply a fixed quantity over a period of time. Since the
customer promises to buy the fixed quantity of goods/services, they will get a discounted price.
The document type in SAP for quantity contract is QC. For example, in this example, the
quantity contract is for quantity 100 of say material M-01. Release orders are orders created with
reference to the contract to consume the quantities in the contract. So the first release order is for
quantity 20 which consumes 20 % of the quantity in the contract. Similarly, the rest of the
release orders consume the remaining quantity in the contract. Document flows should exist
between the contract and the release order types. There are 2 primary reasons why quantity
contracts are used.

1. When Quantity is Limited – When the production quantities are limited in numbers, then
customers are allocated a specific quantity by time -period ( say a month, or a quarter ) . And
customers cannot place ad-hoc orders, but have to first sign a contract for a fixed quantity and
always order via release orders that specifically refer to the contract.
2. When Vendors want to Lock-in Customer quantities – Some times to give deep discounts, sales
folks require that customers commit to buying a fixed quantity over a time-period. This satisfies
the sales figures .

Service Contract

A service contract is normally created for service-oriented items – examples are annual service
contracts, annual maintenance contracts.
For example, when you buy an internet connection from comcast, they are providing services to
you for a fixed period – say 1 year or 6 months. And for providing those services, they charge
you monthly. In this case, there are no release orders because in case of service since there are no
logistics operations, directly the customers are invoiced with reference to the contract. In this
case, the customer is charged $100 a month for 12 months with a total of $1200. The items in
these types of contracts follow billing-plan. Repairs also follow service contract methodology.

Master Contract

A master contract is used when a particular type of contract is created regularly for a customer
and you want all the header data to be consistent across all of the contracts. Normally, the header
data of a sales document contains data from the Customer master.
For example, if a contract is created for a customer say 1400, key data like inco-terms, payment
terms, delivery preferences, taxability etc flow from the customer master data for that sales area
for customer 1400. However, if you consistently change the data in the contract to a fixed value,
say the inco-terms should always be FOB Destination for all contracts, while regular sales order
have CIP Philadelphia, you can create a master contract for customer 1400 and change the inco-
terms in the master contract to FOB Destination. All subsequent contracts that refer to this
master contract will have the inco terms as FOB Destination.

Value Contract

A value contract is very similar to a quantity contract – except that instead of a fixed quantity,
the value of the contract is fixed ( ie the dollar amount of the contract is fixed ) while the
materials that the customers procure could come from either a fixed basket of materials or a
single material only.
For example, in the example shown above, the type of contract is a value contract for a specific
material – ‘WK2′. Essentially, this contract is limiting the value of the contract to a fixed dollar
value and the customer can release multiple release-orders referring to the value contract for that
specific material. If the customer wants to create contracts for specific value and not limit them
to a particular material, then an assortment module can be used. The type of value contract that
refers to an assortment module is ‘WK1′.
An assortment module is a basket of materials ( a fixed set of materials ) without any specific
quantities or prices. When some of the materials in the assortment module needs to be used in the
value contract, the assortment module is searched for ( by name or number ) and the materials in
the assortment module are selected and quantities specified. Price can be either manually
specified or automatically done. We will discuss more on this during the configuration section.

Configuration

The configuration path for Contracts specifically ( other than document types ) is [ SPRO ->
IMG -> Sales and Distribution -> Sales -> Sales Documents -> Contracts ]

The configuration for master contracts is shown below. The child contracts ( contracts that refer
the master contracts ) are called referencing sales documents. We have to first define the contract
document types that can reference a particular master contract document. The standard master
contract document type in the IDES system is GK.
The child contracts that reference the master contracts are bound by the referencing
requirements. The referencing requirements are specified in the reference procedure – SDGK.
The fields that can be referenced in the lower level contract are specified as technical fields (
Table, Field combination ) along with the copy rule and message. As shown in the picture below,
the reference copy rules can be ‘A’ – Check for Agreement, ‘B’ – Always copy or ‘C’ – Copy
only if agrees. These copy rules are used to over-ride customer master derived data ( incoterms,
payment terms, taxability etc ) by the data in the master contract header. The message flag is
used if a warning message should be shown in case data differs. However, this message cannot
be changed to error in configuration.
Contract Profile

A contract profile primarily specifies the automatic rules for determining dates ( start date, end
date and validity period ) and cancellation procedure. Some of the reasons why they are used
could be to automatically populate the dates for some contract types. For example if a particular
contract document type always is used for a period of 2 years, then a contract profile with a
validity period category of 2 years can be assigned to the document type in Sales document type
configuration [VOV8 ]. The validity period for example can be defined as follows.
As shown, the validity period category of ‘Z5′ indicates that he contract profile is valid for 5
Years ( ’4′ is the validity period unit for years ). This finally comes together in the Date
determination rules. For example, the date determination rule ’08′ says the contract end date
should be computed based on the contract start date ( as opposed to another date, say goods
acceptance date or billing date ) + the contract validity period.

Contract Creation DEMO

Transaction Code / Menu Path :

[VA41] or [Sales and Distribution -> Sales -> Contract -> Create ]. Enter the contract type from
the drop downs. The typical contract document types in a standard IDES system are

GK – Master Contract

QC – Quantity Contract

QP – Rental Contract

Wk1 – Value Contract

WK2 – Material relevant value contract

SC – Service and Maintenance Contract etc

The start and end dates are either automatically determined ( if there is a contract profile with
date determination rules assigned to the contract document type ) or they can be manually
entered. For example, in a quantity contract, the target quantity can be entered along with the
dates.

Release orders can be created with reference to the contract as follows. You can use ‘OR’ –
standard order or you can use any other custom document type created as a copy of OR or
otherwise ( however, please be advised that there should be a copy control created between that
contract document type and the release order document type ). When creating the release order,
click on “Create with Reference” button on the left top corner. A pop-up will open up. Select the
Contract tab. Enter the quantity contract number there or search for it. By default the entire
consumable quantity in the original contract is copied over to the release order. However, the
quantity can be changed in the release order according to the requirements of the user. The
quantity referenced will be deemed as ‘Referenced’ in the item’s status of the quantity contract.
For example, in this example, there are 2 release orders 12960 and 12961 created with reference
to the quantity contract 40000209. The quantity contract is for quantity 100, while the release
orders have each released 50 and 25 in quantity. That is the reason why the status of the line item
in the quantity contract is in the state “Being Processed”.

However, after the third release order is being processed for another 25 quantity, the item’s
status in the contract is set to “Completed”. This is also explained better in Item Category
configuration in SAP.

Assortment Module

To create an assortment module goto [Sales and Distribution -> Master Data -> Products ->
Value Contract -Assortment Module ] OR [WSV2]
You will have to give a name ( in this case Module-1 ), enter the materials and validity dates.
Now you can use the assortment value in the value contract by entering the assortment module in
the contract. To release the contract however, you will have to select the materials from the value
contract. The way you do it is as follows. As usual create the release order with reference to the
contract, and during the process of selecting the items in the pop-up, select the line item and
click on “Expand Assortment”

and select the materials and quantities. Depending on the quantities selected, the order will be
priced. You can do the same using material specific contracts as well – Just that you do not need
an assortment module to do the same.
Service and Maintenance Contract

Service and maintenance contracts typically follow a billing plan that is typically periodic. For
example, if you choose the material REPAIR_SERVICE in an ides system in sales area (
1000,14,00 ), enter the line item and click on billing plan button.

you can see the billing broken down by period – In this case month – in the billing plan tab of the line
item.