ACM contract information and features
In this chapter we are looking at additional contract features unique to ACM enabling agricultural companies to manage their contracts throughout the entire lifecycle. It will not describe all features and terms that are more common across different industries, like the ability to define incoterms, payment terms or general terms and conditions.
Tolerances
Tolerances in agricultural origination and trading allow the involved counterparties to define the behavior if the delivered quantity does not match the contractually agreed quantity. In most cases, contractual fulfillment is managed by the delivered quantity. Exceptions are vehicle contracts; please refer to previous part 1.
Over and underdelivery and therefore usage of tolerances happens frequently and is due to the nature of bulk commodity goods.
For example: if the physical delivered quantity exceeds the contract quantity, what should be the default behavior:
- Allow to apply against the contract and specify which price should be used for it?
- Do not allow to apply against the contract (zero tolerance)? In this case the over delivered quantity would have to be applied against another contract.
A tolerance can be defined as either:
- Absolute tolerances. Any over or under delivery is accepted up to a specified quantity (i.e. 200 KG +/- is allowed)
- Percentage, like 10% over-/ under delivery is allowed. In this case the quantity is dynamically calculated using the contractually agreed quantity as a baseline.
In either of these cases the tolerance definition includes how to price the over-/ under deliver quantity.
- Overfill = delivery quantity that is over the contractually agreed quantity, but within the defined tolerance. In this case an end user can either manually price the quantity or have the system automatically assign a price. For automatic assignment, ACM supports using the same price as the last price fixation that has been settled or price the overfill at the average of all to the contract item assigned price fixations. The overfill has to be priced in order to allow a final settlement.
- Underfill = delivery quantity that is under the contractually agreed quantity, but within the defined tolerance. Other than the overfill the underfill is often priced by companies at a price of zero. This is indicating that the contract counterparty “is not fined” for the not delivered quantity as it is within tolerance. Alternatively, also a price can be set (same options as overfill) which will get charged to counterparty.
Optionalities
Besides managing differences in agreed vs. actual contract quantities, agricultural companies also need the ability to define exception behavior for other contract terms and conditions. These exceptions, or additional execution options (= optionalities) may include the ability to ship against a different incoterm other than the contractually agreed, or the use of a different load or unload location. A surcharge or discount might be applied when these additional options are exercised.
Example: In the purchase contract it was agreed that the commodities will be delivered to plant A. The buying company however is requesting the vendor to deliver to plant B instead; reason might be that plant B is low on inventory for the specific commodity and in urgent need for it. Plant B is therefore added as an optionality to the contract to allow the physical delivery to plant B. The definition of the optionality includes that also an additional surcharge is paid to the vendor whenever he delivers to plant B to cover the additional freight cost or also as an incentive to deliver to this specific location.
A set of optionalities is pre-delivered by ACM, but additional can be defined by customers to meet additional or custom needs. Pre-delivered optionalities include:
- Load / Discharge location
- Incoterms
- Mode of Transport and Means of Transport
- Load / Discharge rate
- Delivery period
- Alternative customer / vendor
Fees and expenses
SAP Agricultural Contract Management offers a variety of capabilities that allow companies to plan and manage their additional contract related costs or charges.
Fees vs. Expenses: what is the difference?
As per ACM processes there is a distinction between fees and expenses. For fees only the company itself and the contract counterparty are involved in the transaction. For expenses, an additional third party like a broker or service provider is involved who is charging for an external service they offered. This distinction will also allow to comply with different regional accounting requirements as the timing of expense and fees may differ.
Fees:
A fee that is planned on the contract can be charged in either direction. The agricultural company can charge their contract partner for a service or vice versa, needs to pay the counterparty for a service rendered. There are many examples for fees that either of the two counterparties need to pay, like: loading / unloading fees, cleaning fees or drying fees. Additionally, there are also industry specific fees like No Pricing Established fees offered by ACM, which however will be explored more in detail in a future blog.
Planning a fee on a contract will result in the fact that this specific fee will be charged or paid anytime the contract is executed.
Expenses:
Contrary to fees, in expenses the company hires an external service provider to provide a specific service that the company needs to pay for. The company may choose afterwards to pass these 3rd party cost onwards to their own customer / vendor. Typical expenses include broker or surveyor costs.
Similar to fees, expenses are typically planned on the contract and executed for each delivery. Differences in the handling to fees are:
- At time of expense planning on the contract, the actual service provider and therefore the expense rate might not be known. Examples are surveyor costs. If the company works with multiple surveyors and at time of contract entry it is not know which surveyor will be handling which specific delivery. Planned expense rates are therefore often only estimated on the contract.
- The planned expense costs are typically financially accrued. In ACM this happens at time of goods movement automatically, however this is an optional process step. Accruals are reversed when the actual invoice from the service provider is posted.
- Expense recovery: as an optional step the company may choose to pass the paid expense cost on to their own counterparty.
Expenses will be addressed more in detail in a future blog.
