Advances and Progressive Contract Financing

Advances and Progressive
Contract Financing
Chapter 11
Copyright © Oracle, 2007. All rights reserved.
Advances and Progressive Contract Financing 527226170.doc

Effective 05/01/2007 Page 1 of 28 Rev 1
Advances and Progressive Contract Financing
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Objectives


Payables integrates with Oracle Purchasing and Oracle Services Procurement to provide an
integrated solution to automate acquisition of complex services. Complex service contracts are
characterized by:
• High currency value projects
• Long lead time delivery schedules
• Progress payments based on work completion
• Advances and progress based financing options
• Retainage options
Payables provides the functionality to release progress payments, release and recoup advances,
apply retainage on invoices, and release retained funds.
To understand this feature you will need to understand the following terms.
• Progress Payments. Payments released for work partially or fully completed on a Progress
Payment Schedule.
• Pay Items. A Pay Item refers to a specific work or service component of the Progress
Payment Schedule. It describes the work or service that needs to be completed, and the

payment amount associated with that work or service. So a Progress Payment Schedule
basically consists of several pay items. Pay Items can be of different types – they can be
based on rate of work or service being delivered, or based on a lump sum amount for a
service, or they can even be based on a event or milestone on the contract.
• Progress Payment Rate. A payment term used on cost reimbursement contracts. On these
contracts progress payments released to the Contractor are based on the costs incurred by
the contractor during the execution of the contract. The progress payment rate is used on
these contracts to compute the reimbursement amount based on the cost incurred by a
contractor. The Progress Payment Rate is usually negotiated between the Buying
Organization and the Contractor.
• Contract Financing. Contract Financing is often used on 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 prior to the delivery of the contract line item.
• Advances. An Advance is a type of financing payment and is usually released before any
work or service has been performed on the contract. It is often used to offset some of the
upfront costs associated with initiating work on the contract.
• Recoupment and Recoupment Rate. The liquidation of previously released financing
payments. This liquidation is done from payments released for the delivery of services.
The recoupment rate represents a rate (as a percentage) that is applied to Invoices
submitted by the Supplier for the delivery of services specified on the contract. This rate
determines the fraction of the Invoice Amount used towards recoupment of previous
financing payments.
• Retainage and Retainage Rate. Retainage is often used in the procurement of Construction
services by the Client to mitigate the risks of ensuring completion of the contract.
Sometimes in large contracts which are at the point of substantial completion, there is
often a punch list of jobs that need to be completed. On these contracts if the balance
payment due to the contractor is not large enough to cover the costs of completing the
punch list jobs, the contractor may not finish them. Retainage is withheld from progress
payments to ensure a sufficiently high balance payment amount so that the contractor
finishes all jobs on the contract. The Retainage Rate specifies a percentage of the invoice
amount billed by the contractor that is withheld from payment. This retainage amount
represents a deferred liability due for payment in the future.
For more information, see: Complex Work in the Procurement Suite, Oracle Purchasing User's
Guide.

Advances and Contract Financing
Advances and Contract Financing

Suppliers can request an advance or a contract financing prepayment, using iSupplier Portal.
Invoice requests submitted through iSupplier Portal must go through an approval process
before the Invoice Request becomes a Prepayment Invoice.
An Accounts Payables clerk can also manage the prepayment request by entering a Prepayment
Invoice in Payables.
The system ensures that the Prepayment invoice is matched to the Contract Advance, which
prevents over billing beyond the negotiated value. The purchase order is then updated with the
amount billed.
The invoice can either be paid immediately or you may wish to require that the invoice go
through another set of approvals prior to issuing payment. Note that all prepayments must be
paid in full before any amounts can be liquidated on subsequent delivery invoices.

Progress Payments
Progress Payments
Once work on the contract begins, the Supplier submits work confirmations for the work that
has been completed on the contract. Work confirmations are submitted using iSupplier Portal
and, like other invoices submitted through iSupplier Portal, the work confirmation is
considered an Invoice Request until it is approved and converted into a Standard Invoice in
Payables. The resulting invoice is created using a combination of the work confirmation and
purchase order information and is referred to as the Progress Payment.
For projects that use advances and progressive contract financing, the purchase order is set to
Pay on Receipt (Self Billing). Once work is confirmed or goods are received, then the invoice
can be paid. For example, assume on a $1,000,000 project, that a Supplier submits a work
confirmation for resurfacing a parking lot for $200,000. The invoice breakdown is as follows:
• Items = $200,000
• Retainage = <$20,000>
• Recoupment = <$50,000>
• Total = $130,000
Retainage is set on the contract. Retainage is a portion of the invoice that is retained and held
as a liability (from an accounting perspective) until it is released at the end of the project or

when agreed events have occurred. In this example the retainage rate is 10% of the invoice
total. The invoice amount is reduced by the retained amount.
Recoupment is also set on the contract. Recoupment is the amount of the advance that is
recouped with each invoice the supplier submits. In this example, the recoupment rate is 80%
of the invoice amount. The actual recoupment amount of an invoice is determined by first
calculating the amount of the invoice eligible for recoupment by multiplying the corresponding
invoice lines total by the recoupment rate ($200,000 x 80% = $160,000). Because the advance
paid on this project is less than the total recoupment amount permitted by the contract, the
entire $50,000 is recouped. The invoice amount is reduced by the amount of the recouped
amount.
As work is completed or costs are gathered, the supplier continues to submit Work
Confirmations, which in turn, are reviewed and approved by your internal representatives.
Approved Work Confirmations become invoices in Payables where advances are recouped and
retainage is withheld until the maximum retainage amount stipulated on the contract is reached.
As the project comes to a close, the supplier will request the Retained amounts ($100,000).
Payables provides a special “Retainage Release” invoice type to record this unique transaction.
The Retainage Release invoice is matched to previously withheld amounts so you will never
release more than you originally retained. The retainage liability account is cleared and
payment is made after the retainage release is approved.

Entering Advances and Contract Financing Invoices
Entering Advances and Contract Financing Invoices

An advance prepayment invoice is matched to a purchase order number, line numbers, and
distributions. Pay items are not matched for an advance, since an advance is paid once before
any work commences and is not based on performance.
A contract financing prepayment invoice is matched to a purchase order number, line numbers,
pay items (shipments), and distributions.
Note: Oracle Payables ensures that the amounts financed and later recovered never exceed the
allowable amounts designated by the specific terms captured in the purchase order.
The information in the Payment Type field of the Match to Purchase Orders window indicates
whether the service procurement purchase order row is an advance or contract financing. The
Shipment Item Description field provides a description of the item ordered on the purchase
order for which the Advance was provided. The Shipment Item Description field provides a
description of the pay item on the purchase order for contract financing.

Tolerances and Holds on Advances and Contract Financing
Tolerances and Holds on Advances and Contract Financing

Tolerances are used to control acceptable prepayment invoice variances of supplier invoices
for price, quantity, and amount information compared with what is stipulated in the contract.
The following types of tolerances are used:
• quantity-based tolerances for goods procurement
• amount-based tolerances for services procurement
Tolerance templates are used to control tolerances across organizations for any supplier site.
You can create multiple templates for invoice tolerances in the Invoice Tolerances window, but
you can only assign one set of tolerances per supplier site. The Invoice Tolerances window
enables you to designate the type of tolerance template as either Goods or Services. If you
select the Goods template type, then holds placed for Ordered, Maximum Ordered, Received,
and Maximum Received tolerances are based on quantity. Similarly, if you select the Services
template type, then holds placed for Ordered, Maximum Ordered, Received, and Maximum
Received tolerances are based on amount. You can create two sets of tolerances for each
supplier site; one for Goods and one for Services.
The tolerance templates are applied during invoice validation per invoice line depending on the
PO Line Type and Pay Item Line Type. For example:

• If the PO Line is Fixed Price and the Pay Items are Lump Sum, the system uses the
Services template assigned to the supplier site. If the Services template type is applied, the
price tolerance is disabled, since price validations are applicable for services.
• If the PO Line is Fixed Price and the Pay Items are rate based, the system uses Goods
template assigned to the supplier site. While it is a Goods template, it represents quantity-
based matches.
• If the PO Line is Fixed Price and the Pay Items are Milestone, the system does not use a
tolerance template, because any variance is not acceptable. Oracle Payables places a
milestone hold for goods if the price and amount are not exact or if the quantity billed is
over the quantity ordered.
During the validation process, a matching hold is placed on prepayment invoices if the amount
ordered, received, maximum ordered, maximum amount received, or milestone tolerances are
violated.

Work Confirmation
Work Confirmation
For contract financing prepayments, you can use 2-way or 3-way matching. Three-way
matching verifies that the purchase order, the invoice, and receiving information match within
accepted tolerance levels. The work confirmation receipt is the only type of receipt allowed for
complex service contracts.
If the amount of work completed is equal to the amount billed on the invoice, then the invoice
is eligible for payment. If the amount of work completed is less than the amount of work billed
on the invoice, then the invoice is placed on a matching hold.
Advance prepayments can only be 2-way matched, that is, verifying that the purchase order
and the invoice match within accepted tolerance levels, since there is no work or deliverable
associated with an advance.

Funds Checking and Encumbrance for Advances and Contract
Financing
Funds Checking and Encumbrance for Advances and Contract Financing

If the Budgetary Control feature is enabled, the Funds Check functionality verifies that
sufficient funds are available to pay an invoice. If sufficient funds are available, funds reserve
occurs during validation. Oracle Payables totals distribution amounts by account and checks
whether any of these totals exceed available funds for the distribution account. If a single
account fails funds checking, the entire invoice fails funds checking. Funds can also be
checked manually.
If budgetary control and encumbrance functionality are enabled, Purchasing and Payables
create encumbrances and encumbrance reversals against the budgets defined in Oracle General
Ledger. Encumbrances are anticipated expenditures. Advances and contract financing
prepayments are always matched to a contract line pay item and recouped from an invoice
delivery item for that same contract line.
Note: Oracle Payables only encumbers upon delivery and not when the prepayment invoice is
entered.

Taxes for Complex Service Contract Invoices
Taxes for Complex Service Contract Invoices

Payables integrates with E-Business Tax to provide tax services for your invoices. The table in
the slide above indicates what amount and tax set up is used to calculate tax for your complex
service contract-related invoices.
Prepayment Invoices
If you enter a prepayment invoice for an advance or contract financing, then the taxes on those
invoices are calculated based on the prepayment invoice amount, using the tax rules defined for
Advances or Contract Financing respectively. Tax rules are defined in E-Business Tax. Note
that if you recoup your prepayment, then the tax is reversed on the prepayment recoupment
either by recalculating the prepaid tax based on today's rates or by prorating the prepaid tax
based on the recoupment amount.
Standard Invoices
If you enter a standard invoice for progress payment, then the taxes are calculated based on the
invoice amount, net of retainage.
If you enter a standard invoice which is for a final delivery, then tax is calculated base on the
invoice amount.

If your invoice contains retainage, then tax is calculated on the invoice amount net of retainage.
For example if the progress payment invoice is $100.00 and the retainage is 15%, the invoice
amount will be $85.00 plus tax at 10% of ($8.50). The total invoice due the supplier of $93.50.
Retainage Release Invoices
For retainage release invoices, tax is calculated on the retained amounts ready to be released
based on the original invoice's tax drivers.
For more information on E-Business Tax, calculating tax for invoices, and tax drivers, see the
Taxes module, or the Oracle E-Business Tax User Guide.

Retainage Amount for Complex Service Contracts
Retainage Amount for Complex Service Contracts

The retained amount on progress payment invoices is based on the contractual terms defined in
the service procurement contract or purchase order line. The percentage withheld is negotiated,
defined in the contract, and is based on the risk factors involved. These risk factors include the
performance and reliability of the supplier.
A contract line can be associated with one or more progress payments. After performing a
portion of the contractual work, the supplier sends a progress payment invoice to the buying
organization, requesting payment against the service procurement contract line or purchase
order. The progress payment invoices submitted by a supplier are recorded as Standard
Invoices in Payables. Oracle Payables withholds a portion of the invoice during matching to
these payment lines (2-way matching) or to the receipts of these payment lines (3-way
matching). The retained amount is represented as negative distribution amounts of type
Retainage to the matched invoice line.
Note: You cannot override calculated retained amounts and you cannot enter retained amount
manually.

Oracle Payables supports progress invoices with the following invoice amounts:
• Net of Retainage. If the Net of Retainage check box is enabled, during validation, the
invoice amount net of retainage ($85.00) is compared to the invoice amount entered in the
invoice header region to determine if the invoice should be placed on a line variance hold.
• Gross of Retainage. If the Net of Retainage check box is disabled, the invoice validation
process compares the gross amount ($100.00), to the invoice amount entered in the
invoice header region to determine if the invoice should be placed on a line variance hold.
When an invoice amount entered is net of retainage, as indicated by the selected Net of
Retainage check box at the invoice header, there is no impact to the creation of the payment
schedule or adjustments. When an invoice amount entered is gross of retainage, the payment
schedule is adjusted. The adjustment reduces the gross invoice amount in the payment schedule
and occurs at the following event points:
• anytime retainage is computed on an invoice
• when an invoice line with retainage is discarded
• when an invoice with retainage is cancelled
Discountable Basis of Payment Schedules for Invoices with Retainage
Whenever payment schedules are recreated, the amounts applicable to a discount take retainage
into account and are net of retainage.

Retainage Lines for Complex Service Contracts
Retainage Lines for Complex Service Contracts

Progress payment invoices have pay items of types:
• Rate
• Milestone
• Lump Sum
The retainage information for each pay item is stored in the Retained Amount field for the
matched invoice line. The system creates negative retainage distributions prorated to the item
distributions.
Discarding Invoice Lines with Retainage
If you discard an item line with retainage, the retained amount of the pay item is reduced.
When the reversing distributions are created, the retainage distributions are also reversed. If the
invoice amount is gross of retainage, the gross amount of the payment schedule is increased.
If a line carries retainage information and some or all of the related retainage releases have
been billed, then the original invoice line cannot be discarded, since the retainage release lines
contain references to the original standard invoice line.
Important: Discarding retainage release line leaves incorrect balances.

Invoice Line Corrections with Retainage
Price, quantity, and amount corrections are allowed for a base-matched item line. If, however,
an item line carries retainage, and some or the entire retained amount has been released, no
corrections are allowed on the item line.
Note: You cannot correct an item line with released retainage.
Line-Level Matching/Corrections and Retainage Computation
If you correct an invoice line with retained amounts, the PO API is called to retrieve the
amount to retain and displays it by populating the Retained Amount field in the Lines tab. Also
the matching/corrections API takes the retained amount and creates the necessary retainage
distributions if the Net of Retainage check box is selected. In cases where the Net of Retainage
check box is disabled, the matching API also updates the payment schedules.

Retainage Release for Complex Service Contracts
Retainage Release for Complex Service Contracts

Once most or all of the work is completed on a complex service contract, you can release the
amounts retained during the life of the contract. Retainage terms in a service procurement
contract are agreed upon by the buyer and the supplier and are defined in the contract. Payables
receives any required contract data from Oracle Purchasing, Oracle Projects, and Oracle
Contracts.
Once the release criteria are met, suppliers request a release of the retained amount by
submitting a document called a Retainage Release Request. After the request is approved,
Payables converts the Retainage Release Request to create a Retainage Release invoice. A
retainage release invoice has lines, which are copied from the original standard progress
payment invoices, which show an amount left to be released.
To release retainage amounts:
• Select the Release button to prorate the release amount to all the invoice lines that are
matched to a pay item and not fully released.
• Select the Lines button and enable the Select check box for each line for which you want
to release retainage. When a line is selected, the system defaults the amount that can be

released. If necessary, you can override the amount, then select the Release button. Based
on your selection, the system creates retainage release lines and retainage distributions.

Recouping Advances and Contract Financing Payments
Recouping Advances and Contract Financing Payments

When the supplier or contractor submits invoices for the project, any prepayments are
recouped from the previous advances or contract financing. Recoupment rules present in the
service procurement contract enable Payables to automatically draw against the prepayments
and reduce the amount due on the delivery invoice.
Automatic recoupment occurs as part of the matching process at the following event points in
Oracle Payables:
• header-level matching,
• line-level matching,
• open interface import.
Advances and contract financing prepayments are automatically deducted from the standard
invoice delivery payments for the contract line. The advanced or financed prepayment items
are matched to a specific contract line in a service procurement purchase order. They are
applied to, or recouped from, the same contract line with the delivery of the item, up to the
unpaid invoice amount.
Recoupment amounts are automatically calculated for every standard invoice item line that is
matched to a service procurement purchase order delivery pay item or shipment. It is based on

the total available amount of financed pay items or shipments for that same contract line.
Recoupment treats advances and contract financing prepayments differently.
For advances, the progress payments and the final delivery invoice are all considered progress
payments. Progress payments can be based on a milestone, a rate, or a lump sum.
For contract financing, all progress payments are called prepayments. The prepayments are
recouped, or drawn down, against the total amount due. The final delivery invoice is for the
total amount due, rather than a portion of the total amount due.
You cannot manually recoup prepaid amounts. You can, however, manually change the
automatically generated recouped distributions by discarding the standard invoice item line,
correcting the service procurement contract line, and then re-entering the standard invoice item
line.
The order of a recoupment is on a first-in, first-out (FIFO) basis by the prepayment invoice
payment date, with contract financing recouped first and then advances. After the recouped
amounts are calculated, the payment schedules are adjusted for the amount remaining. You can
view the recouped amounts in the View Prepayment Applications tab in the Invoice
Workbench window.

Recoupment Amounts
Recoupment Amounts
Determining the Available Recoupment Amount
If an advance or contract financing prepayment is available to apply to a progress payment
invoice, Payables determines the maximum amount to recoup for each line item. First,
retainage is calculated and subtracted from the invoice amount, then the available prepayments
are applied on a First-In-First-Out (FIFO) basis according to the prepayment payment date.
To determine the correct amount to apply, Payables does the following:
The amount applied must be equal to the lesser of the amount available to apply or the
maximum amount to recoup. The amount available to apply depends on the availability of
payments that can be applied to each of the standard invoice item lines that are matched to a
service procurement actual delivery pay item. The prepayments available for consideration are
the available advance or contract financing pay items that are from the same purchase order
line as that of the standard (progress) invoice line.
Payables calculates the amount to recoup according to the following rules. Retainage is
calculated first, if applicable. The maximum amount to recoup is based on the following
formulas:

• If (Gross Invoice Line Amount)(Recoupment Rate) > (Gross Invoice Line Amount Net of
Retainage), then Maximum Amount to Recoup = Amount Net of Retainage.
• If (Gross Invoice Line Amount)(Recoupment Rate) < (Gross Invoice Line Amount Net of
Retainage), then Maximum Amount to Recoup = (Gross Invoice Line Amount)
(Recoupment Rate).
The amount that is applied is the lesser of the Amount Available to Apply or the Maximum
Amount to Recoup.
The available prepayment lines that are matched to a service procurement purchase order are
applied to the standard (progress) invoice amount of the invoice containing the lines that are
matched to the same service procurement purchase order. The FIFO basis is used according to
the prepayment payment date. These amounts are applied first, then the remaining available
prepayments, until the prepayments applied equal the value of the amount to apply.
Manually Applying and Unapplying Prepayment Invoices
You can manually apply prepayment invoices to standard invoices by using the Apply/Unapply
Prepayments window in the Invoice Workbench. Since the recouped amounts are calculated
during the matching process, they are defaulted and are available upon entering this window.
The amount remaining in the payment schedules is adjusted based on both the retained and
recouped amounts.
You can only apply the available prepayment invoices that are not matched to the financing
pay items and do not total more than the amount remaining in the Apply/Unapply Prepayments
window. The recouped amounts cannot be displayed or unapplied from within the
Apply/Unapply Prepayments window.
Calculating the Recoupment Amount
Oracle Payables determines how much of the prepaid amount to recoup, based on which ever is
less:
1. The gross amount of the invoice line multiplied by the recoupment amount.
2. The matched line balance after retainage.
3. The unapplied advance balance.
Adjusting Payment Schedules
When you save the header of a standard invoice, Payables creates the payment schedule for the
invoice. When you apply prepayments to the standard invoice, Payables adjusts the payment
schedule accordingly. If you enter a progress invoice with recoupment, the system adjusts the
payment schedule and reduces the gross amount. Recoupment events that result in an
automatic adjustment to payment schedules are the following:
• Calculating recoupment for a progress invoice, such as matching to purchase orders,
making corrections, and line-level matching.
• Discarding an item with a prepayment distribution results in an increase in the gross
amount.
• Canceling an item with a prepayment distribution results in an increase in the gross
amount.
Correcting Prices, Quantities, and Amounts
You can perform price, quantity, and amount corrections to reflect adjustments of unit price,
quantity, and amount previously billed through a specific invoice matched to a purchase order

or receipt. The corrections can be performed in the context of matching to a purchase order or
receipt line. Access the Corrections window to make your corrections.
If the original base-matched invoice has an amount recouped, then the corrections that result in
increases to the original base-matched invoice should update the Amount Recouped
information in the PO shipment in the purchase order entity. The corrections that result in
decreases to the base-matched invoice do not update the amount recouped information in the
PO shipment.

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