Explaining the Definition of a Contract and the possible Contract Management Processes

Chris recently joined the Finance and Real Estate department at Real4Estate Company. Today is his first day with the new team and he wants to learn quickly to be able to fulfill his new responsibilities.

In the following video, Chris introduces himself and the new company. Select the play button to get to know him.

Chris has his first day at work today. After receiving his laptop and other documents, Chris meets his colleague, Maria. Her manager has given Maria the task of supporting Chris during the onboarding phase.

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Maria opens a presentation file on her laptop and shows Chris the following slide. She uses the slide to explain, generally, what a contract is.

A contract is an agreement between several contractual partners regarding one or more contract objects. A contract has a start date that is agreed on between the partners, a duration, and/or agreements for notices and renewals. The contractual partners define payments (contract conditions) for the usage or the purchase of the contract object(s).

This contract definition applies to both real life contracts and also SAP Real Estate Management. Contracts related to real estate objects are lease-in or lease-out contracts for offices, apartments, stores, and so forth. They also apply to purchase contracts and different service contracts.

In SAP Real Estate Management, you can represent all these types of contracts and the related business processes, such as posting processes for the payment of the contract conditions, notices, and renewals.

You can also create reminders to check contract dates, create correspondence with your contract partners, and adjust the contract conditions during the duration of the contract. Therefore, the complete lifecycle of a contract is represented within SAP Real Estate Management.

Chris now understands what a contract is. However, he still has a few questions. From his university experience, he recalls the concepts of debit-side and credit-side conditions. He asks Maria about these.

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Maria shows Chris some more slides on her laptop to explain the different contract types the company can enter into the SAP System.

In the environment of real estate management some relevant contract types are lease-in and lease-out contracts, service contracts, purchase and sales contracts or internal contracts.

There are several criteria for the differentiation between various kinds of real estate or service contracts. In general, there is the question of whether the contract partner is in the role of an offerer or a user. This shows then if the contract is a credit or a debit contract. The main contract partner of a lease-in contract is a business partner with a vendor (credit) account, for example, a landlord. The main business partner of a lease-out contract is a business partner with a customer (debit) account, for example, a master tenant.

On the other hand, there is also the possibility to differentiate between external and internal contracts. These contract categories help to decide if an external business partner or an internal contract partner is assigned to a contract. The main business partner of an external (credit or debit) contract is an external business partner, represented by an SAP business partner. In an internal contract, the internal contract partner is represented by a cost center, an internal order, or a WBS element, which are controlling objects.

Let us look at a simple, company-specific example using SAP Real Estate Management.

An example company has leased buildings and some leased cars in its portfolio.

If the company rents a new building and expands its portfolio, it creates a "lease-in real estate" contract in the system. Within this lease-in contract, it creates the corresponding building as a contract object. If the company is leasing a new car for its fleet, it generates a "lease-in others" contract and creates the corresponding car as a contract object. The company also has properties in its portfolio that it has built or purchased. These properties belong to the company, and it can rent them out. There are some properties where individual floors or rooms are rented to external partners, as the company does not need the space. In some cases, entire real estate buildings are rented externally. The company can create a "lease-out real estate" contract and create the corresponding building as a contract object in the system.

"Lease-in real estate" and "lease-out real estate" are only two examples of different contract types that the company can use. It can also use the corresponding contract type to define the purpose served by the real estate contract. For example, it can specify whether the contract is a vendor contract or a customer contract.

Accordingly, the company can create credit-side or debit-side conditions in the contracts that represent payments or receivables. During periodic postings, depending on which conditions are used, the payments and receivables are posted to the corresponding subledgers Accounts Payable or Accounts Receivables.

After explaining the different contract types using a company-specific example, Maria explains to Chris that contract management is the core task, but the solution still has further functionalities and important integrations that he must be aware of. Chris finds this interesting and wants to learn more about it.

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The following graphic shows that SAP Real Estate Management includes functions and capabilities for different areas.

All kinds of contracts need to be managed including the integration into accounting (periodic posting). For example, lease-in, lease-out or service contracts. The central functions of the contract include:

• Contract type concept (vendor or customer definition)
• Business partner integration
• Contract terms (renewal options and notices)
• Conditions
• Resubmissions and reminders for critical dates
• Direct Integration into Finance and Controlling
• And many other things

The SAP contract was enhanced by its function in the context of the adjustment for IFRS 16 and US GAAP ASC 842. Parallel valuation according to various accounting principles is possible (IFRS, US-GAAP, local law).

This is to adjust certain conditions like a rent. It is possible to adjust conditions with automatic methods to do mass changes of individual condition amounts for legal or contractual reason. The condition value gets increased or decreased.

This is a functionality for settling sales-based rent agreements in a real estate contract based on the sales reports of commercial tenants.

Using the Periodic Posting function for a real estate contract, you can post the flows that result from the conditions on the contract or object. The result is that the planned records generated in the cash flow are posted as condition amounts to the assigned accounts of the contractual partner or to controlling objects.

Various tools can be used to check contracts and to check whether errors or warning messages exist. In addition, various reports can be used to analyse contracts for example. You can also generate resubmissions.

Chris has now learned about some of the capabilities of the solution. Maria must move on to another meeting, and so their time together ends for the day. The next day, he and Maria will go deeper into the content.

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