Describe the lifecycle of a contract that need to be created and maintained in the system

Objectives

After completing this lesson, you will be able to:

  • Structure contract management processes according to their order in the contract lifecycle

Contract Management Processes

Chris has learned a lot this week. He now knows what a contract is, understands what is important, and has learned about the different processes behind it. Now he wants to combine this knowledge into a complete contract lifecycle approach.

Select the play button to learn more about the lifecycle of a contract.

To get a better understanding of the contract lifecycle, Chris opens the S/4HANA Public Cloud training system and looks at the interface of the Contract Management app. The Contract Management app is the central entry point to create and maintain contracts.

In this exercise, you will learn how to navigate to the Contract Management app.

Chris learns there are many steps you need to take in the system to ensure a contract can be stored, maintained, and posted correctly. Chris summarizes the steps to better understand the lifecycle of a contract. Once all the relevant contract contents have been maintained, a contract must be activated so it can then be used in periodic posting processes.

At the conclusion of a contract, the contract data must be entered into the SAP system. Therefore, you must assign any contract objects that are going to be leased in or out, or objects representing another asset or service. Contracts can be either external or internal. Depending on the contract type, you will assign external business partners to external contracts, and assign cost centers, internal orders, or projects to internal contracts.

Also, the fees agreed to between the contract partners have to be entered as contract conditions (payment conditions). The posting and frequency data of the contract must be entered as well, as they influence the posting documents for the contract.

When all necessary data is entered, you will activate the contract. Posting processes and other business processes that are relevant for a contract can only be carried out after activation.

Chris opens an existing contract in the training system to prove to himself that what he learned is working. The contract which he opens is not activated. First, he ensures that all the relevant data for the contract is input, then he tries to activate the contract in the system.

In this exercise, you will learn how to activate a contract.

Periodic Posting Process

After the contract activation, Chris looks into the periodic posting process.

You can use the accounting functions provided by SAP Real Estate for lease-in and lease-out contracts as well as for other credit or debit contracts. The business cases for contract-related posting processes are as follows:

  • Your company pays periodic rents to the landlord (vendor).

  • You receive one-time vendor invoices, for example electricity bills.

  • Your company collects periodic rent payments from your tenants.

  • You charge your tenants a one-time fee for services, such as repairs or cleaning.

  • Your company makes internal charges to various departments for their share of use of your business park with or without actual payment transactions.

Contract-related postings are triggered from SAP Real Estate posting functions, such as periodic postings or one-time postings. Posting documents are created in SAP Real Estate Management and also in SAP Financials and Controlling.

Open items for debit and credit positions are generated through periodic postings. These open items can be cleared using the incoming and outgoing payment and account maintenance procedures.

Information contained in the document header such as document type, document header text, and so on, should be specified in Customizing, so that you only need to enter a small amount of information about the document when posting.

Chris is now using the previously activated contract to show how to jump from the Contract Management app into the periodic posting functionality.

In this exercise, you will learn how to use the Periodic Posting app.

Adjustment of Conditions

Chris is also thinking about changes that might happen to a contract. After a contract has been posted, they can sometimes result in changes during the term of the contract. For example, changes to individual conditions. Chris looks at this in more detail and learns the process.

During the validity period of a contract, the contract conditions can be adjusted. To do so, different adjustment methods can be used.

In the example shown in the figure, you can see a contract whose term starts on 01.01.2022. The contract contains various conditions for 2022, including a basic rent of 1.000 EUR per month, an advance payment of 250 EUR, and a basic rent of 500 EUR for an additional contractual property. The tenant must pay a total of 1.750 EUR per month.

However, the rent for the tenant will increase on 01.01.2023. The basic rent will be increased by 200 EUR and 100 EUR respectively. There has also been an increase in the advance payments as part of the service charge settlement, meaning that the tenant must now also pay 20 EUR more per month in advance. This results in an increase of 320 EUR per month total.

To reflect this in the contract, a new time slice will be set up so that payments will be made at the new amount from 01.01.2023 onward. Of course, such a case could occur anytime throughout the year. Conditions can be adjusted in the system at any time. If there have already been postings, the system will calculate the corresponding adjustment postings.

Sales-based Rent

Chris thinks about what other contracts and processes exist. He remembers that there are also sales-based rental contracts. The process of sales-based rent settlement can be used to calculate contract conditions. Sales-based rent agreements are often used for stores and shops in shopping malls, airports, or train stations. His company also has some buildings, where stores are included in the Entrance Area. The rent amount depends on the sales results reported by the tenant. He wonders whether these are treated differently and takes a closer look at the process.

Sales-based rental agreements are contracts where the conditions depend on the sales results of the store.

Tenants report their sales at agreed intervals. During the sales-based settlement, payments that may have been made in advance are not cleared against the settlement result (credit or receivable). You can define several sales agreements for each lease-out contract. Moreover, the sales agreements can be defined time-dependently. As mentioned previously, the sales-based settlement is carried out based on the reported sales.

The settlement results can be corrected at a later time if necessary. To correct the sales results, you can use, for example, certified sales as your data. Based on the certified sales, a final settlement can then be carried out.

In this exercise, you will learn how to identify a contract as a sales-based rental agreement.

Contract Terms

Chris has now looked at how a contract is created, activated, posted, and adjusted. But what happens when a contract ends?

If you consider the term of a contract in more detail, there are two different categories. Contracts that have a defined end date and unlimited contracts, which do not have an end-date assigned. The following questions are important to consider:

  • How do the two contract categories differ from each other?

  • How do you classify the information in case of the contract lifecycle?

When inputting a contract, you must specify the contract term. That is the validity period of the contract. The contract term includes the start and end dates of the contract, along with data about giving notice and how the contract can be renewed. You can define renewal rules for contracts with a fixed term. For contracts without fixed terms, only notices are applicable, as there is no contract end.

You can renew fixed-term contracts by assigning renewal rules to them. There are two types of rules that you may use to renew a contract with a fixed term:

  • Renewal option: Multiple single and recurring options can be defined in the contract. The contractual partner can then renew the contract while keeping the original conditions. Options do not take effect automatically. The contractual partner must declare his or her approval of the option for it to take effect.

  • Automatic renewal: Defines how the contract term is renewed at the end of the contract. The renewal takes effect automatically. For the renewal not to take effect, it must be rejected by the authorized party. The rejection is expressed by giving notice.

In the case of unlimited contracts there are two types of regulations you can use for the assignment of a notice:

  • Deadline regulation: For certain specific notice dates (date), which are also periodic, you can use a deadline regulation. For example, a period of notice of three months on May 31 and September 30 (two dates annually). The notice must be given by the third workday of the following month.

  • Period regulation: You can use a period regulation for periodic notice rules (month end, quarter end, half-year end, year end). The notice period is six weeks before the end of the quarter.

Contract Lifecycle

Chris summarizes the information he has learned in a graphic to illustrate a contract lifecycle.

Select the play button to learn more about the contract lifecycle phases.

From this graphic it is clear you can cluster tasks in different phases. The first phase is the so-called Create phase. In this phase, a contract must be created in the SAP system. This includes contract objects, contract partners, and contract terms of concluded contracts. Furthermore, you can define different rules to generate dates for reminders such as re-submissions. When all necessary data is entered, you can activate the contract. The posting of lease payments, for example, is possible only after the activation of the lease contract.

In the second phase you can change or maintain your contract during its lifecycle. The process of maintaining contracts may include the following tasks:

  • During the validity period of a contract the contract conditions can be adjusted.

  • Adjustments to time slices and contract information.

  • New business partners added.

  • New conditions added, or adjustments made to account determination.

In the third phase you’ll monitor your contract. You can also use the resubmission functionality for this. Here you can set the dates and events for which you want to be reminded. This allows you to monitor a contract at any time and check the contents of the contract as well. During the term of the contract, you also must enter sales reports and perform sales-based settlements. You can set up reminders for this.

In the "give notice" phase a contract can be terminated or extended during the termination phase. In principle, termination is particularly relevant if the contract is for an unlimited period. If the contract already contains an end date, the question of extensions arise. There is also the possibility that a lease contract can be renewed after the primarily agreed contract duration. It is also often the case that there is a follow-up contract. This means that the existing contract is terminated due to the end of its term and a new contract is started.

The contract cycle of such contracts does not differ from the contract cycle of other contract types.

Business Example

Chris thinks about how he can illustrate what he has learned using a real-life example.

Select the play button to learn more about his ideas.

He considers a company example to illustrate the contract lifecycle.

In the example a lease-in contract is created in the system starting on 01.01.2022. The contract includes a building as a contract object, as the company is renting a building from the Business Partner Rent Real Estate LLC. The company is renting the building because they need more space for their employees due to a company expansion. They must pay 9.700 EUR per month in total for the building.

After the contract creation in the system, the contract is activated and ready for the periodic posting processes.

In the periodic posting the 8.500 EUR from the basic rent is reflected and an amount of 1.200 EUR is made for the advanced payments. The periodic posting is done every month and turns the planned values into so-called open items, which are the actual values. This means that the amount can be paid to the business partner in the finance payment run.

In May 2023 they get the information from the business partner that the basic rent increased 200 EUR per month. To ensure that the correct number of payments is received from 01.07.2023 onwards, the condition in the system must be adjusted as of 01.07.2023. A new time slice is therefore created in the system for the basic rent.

The periodic posting is made from 01.07.2023 onwards with the new amount of 8.700 EUR.

Resubmissions were already maintained when the contract was created. Resubmissions remind us that the contract needs to be reviewed. It's important to check and ensure the building is still needed for capacity reasons.

In this example, it’s determined the building is no longer needed. They decided that the contract will be terminated on 31.12.2023.

Chris introduces his result illustration to Maria. Maria is happy and agrees with what’s displayed in the graphic.

Select the play button to learn more.

Chris has now finished his first week and learned a lot of information. Now he’s ready for the next lesson!

Select the play button to understand what's next for him.

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