The 4 Pillars of Commercial Finance in Projects
Project commercial finance connects customers and contractors with operations, accounts and risk management. With construction and infrastructure margins so low, and schedule overruns so typical across the industry, well managed commercial finance can determine project profit or loss. A project-based integrated ERP that is built on the four pillars of commercial finance helps to retain control in a complex space.
Pillar 1: The Contract
Managing commercial finance, no matter the stage of project development, starts with the contract. It provides the mechanisms for payments, incentives and disincentives, and mandates requirements, legal jurisdiction, deliverables and certain insurances and assurances. This critical document sets the tone, rules, and priorities delivering the boundaries within which financial control processes are set up and operated. Documentation control is essential here as side letters, variation orders and other agreements are held against and form part of the current contractual terms.
Pillar 2: Structures
There are two main types of structure to set up: the legal structure and the delivery structure.
The legal structure ensures the correct entities are connected and able to send and receive relevant documentation such as invoices and purchase orders. Such a structure can handle customer and supplier self-service, and internal work packages where multiple internal entities are tasked to deliver on the head contract, allowing for ‘umbrella agreements’ to sub-divide into individual contracts, and to be consolidated when required.
The delivery structure aligns the work breakdown structure (WBS) providing line of sight between contract, project, sub-project, work package and task with the cost breakdown structure (CBS) and even the product breakdown structure (PBS) if required. Not restricted to just these three, these structures represent different lenses through which the same project and same information can be viewed.
Pillar 3: Insurances, Assurances, Budgets And Schedules
Set up at the start and maintained throughout the project, performance guarantees, parent company guarantees, bank guarantees and relevant insurances provide the commercial constructs allowing the project to commence and be financially and legally viable.
Depending on the commercial model, budgets may be agreed between parties or individually, with a CBS providing a view of the entire project through a cost lens, linked to the general ledger for control. Schedules can be agreed for scope and delivery times, with links to payment events such as completion milestones or stage gates.
Pillar 4: Performance, Disincentives And Risk
Performance metrics aligned with scheduled WBS, CBS or PBS allow for visibility of achievements to date, relating to an earned value management (EVM) view of the contract. Cost provisions, force majeure elements and performance penalties such as liquidated damages can be identified within a risk management portfolio and accounted for as they arise. All risks can be grouped, summed, managed and monitored according to the corporate risk procedures.
Depending on the contractual delivery and commercial terms WBS, CBS or PBS can be used directly to determine revenue as project deliverables are accomplished.
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At IFS we understand the requirements of project-based organizations. Our enterprise project management software is delivered with an integrated controllers toolkit and seamless integration throughout our ERP. For more information on the benefits of attaining financial control and governance with IFS Applications please review our infographic, for more insight into financial control in the construction industry read the executive summary. For more information on this topic please connect as below.