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Configuring customer retainage process for Dynamics AX 2012

Retainage is the money that is owed by an upstream party to a downstream party to ensure the agreed project work satisfies the contractual obligation.  It is an essential part of billing cycle in the contracting and construction industry. 

There are two types of retainage – withheld “by customers” and withheld “from vendors”. This article will only cover retainage withheld by customers.

Retainage withheld by customers

A customer withholds a certain percentage from each submitted approved project invoice based upon contractual obligations. These withheld amounts are released at different phases or completion milestones of the project.

System setup and configuration for a Customer Retainage

I am using the “USSI” Demo Company in Dynamics AX to configure customer retainage process for this article.  The steps below explain how to setup and configure the system for customer retainage.

1. Create customer retainage accounts in your COA under the heading of an Assets.

2. Go to “General ledger > Setup > Posting > Accounts for automatic transactions” and setup a customer retainage posting profile.

General ledger > Setup > Posting > Accounts for automatic transactions

3. Create Category group for a customer retainage with transaction type “Fees”. Setup invoice revenue “Project approved invoice account” account as 411500, and WIP – sales value “Unbilled revenue” as a 160600 account.

Project management and accounting > Setup > Categories > Category groups

4. Create shared category with unique category id and meaningful name; select the “Can be used in Project” checkbox to make this category available for a project management and accounting module.

Project management and accounting > Setup > Categories > Shared categories

5. Configure a Customer Retainage category by creating a project category; select Category ID “Shared category” from the list, which you have configured in last step. Select “Retainage”category group from the list, that has been configured in step 3.

6. Select “Customer payment retention” checkbox. Note: If one customer retainage category has been created with a Customer payment retention option enabled then this option is no longer  available for another category.

Project management and accounting > Setup > Categories > Project categories

7. Setup number sequence for a customer payment retention terms from the project management and accounting parameters. I prefer to make it manual, because I can give the meaningful name to a retention terms to make it readable. Note: The systems automatically setup the number sequence after executes the number sequence wizard from “Organization administration > Common > Number sequence”. 

Project management and accounting > Setup > Project management and accounting parameters 

The retention amount deduction from an approved project invoice varies from contract to contract as agreed between two parties; some examples of possible terms are:

  1. 10% for the contract duration
  2. 10% till 50%, then 5% on the remainder
  3. 10% till 50%, then 0% on the remainder
  4. 5% for the contract duration
  5. 3.5% for the contract duration
  6. 6% till 50% then 0% on the remainder.
  7. 4% till 50% then 2% on the remainder
  8. 5% till 50%, then 0% on the remainder
  9. 2.5% for the contract duration
  10. 2.0% for the contract duration
  11. 1.0% for the contract duration

We can setup these terms in system after following the steps below.

8. Setup customer payment retention terms; The various retention’s schedule can be setup under one retention term like 10% retention withholds until 50% completion of a project then 5% retention withhold till completion of a project. The numerous retention terms can be defined.  

Project management and accounting > Setup > Retention > Customer payment retention terms

System Process for a Customer Retainage

Associate Project Retainage Terms with a Project Contract

Project retention terms agreed upon in both parties and this is the substantial part of the contract. Therefore, we have to associate project retention terms with the funding source in a project contract.

1. Create a project contract then associate the project retention terms with a Funding source.

Project management and accounting > Common > Projects > Project contracts


Update the Project POC (Percentage of Completion)

The system automatically calculates the project retention amount based on a project percentage of work completion. Therefore, it is essential to update project percentage of completion before generating the preliminary invoice (known as the “invoice proposal” in the Dynamics AX) .

1. Select the project from the list, then click on edit button and after that, enter the percentage of work complete to date.

Project management and accounting > Common > Projects > All projects


Create and Post Project invoice

Create an “invoice proposal” in the system. This invoice can be created based on billable posted transactions and for on-account transaction that have been registered. Customer advance can also fully or partially reconcile with a created preliminary invoice.

1. Select the project from the list

2. Click on “Manage” tab from top action bar and press Invoice proposal icon. While creating the preliminary invoice “invoice proposal”, the system provides the option to reconcile partial or full advance payment with invoice. Note: I am supposing in case of a Fixed price project, on-account invoice has already been created. 

Project management and accounting > Common > Projects All projects

After getting endorsement of the submitted preliminary invoice from a customer, post the invoice into the system. The system automatically deducts the project retention based on an associated project retention terms with a project contract.  Note: Invoice proposal workflow shall be configured to automate this activity.

3. Select the preliminary invoice (Invoice proposal), then post it.

Project management and accounting > Common > Project invoices > Invoice proposals

4. The system has been deducted retention amount from the invoice and displaying on a project invoice.

The financial impact of project invoice is as follows:

Generate the customer statement report and confirm receivable amount should show after deducting the retention amount.

Request retention amount

The retention amount releases when project work is substantially completed, based upon contractual obligation.

Some of the examples are as follows:

i. Release retainage amount after the accomplishment of warranty period.
ii. Release 30% retainage amount after completing project, remaining amount after the accomplishment of warranty period.
iii. Release 40% retainage amount after completing project, remaining amount after the accomplishment of warranty period.
iv. Release 50% retainage amount after completing project, remaining amount after the accomplishment of warranty period.

When retention amount is due,  you can request the project retention amount from the customer by performing the following steps.

1. Select a project or contract from the list, after that click on Request retained amount button.

Project management and accounting > Common > Projects > All Projects > Manage > Customer retained payment

OR

Project management and accounting > Common > Projects > Project contracts > Maintain >Customer retained payment

Once the customer agrees to release the requested retention amount, post the invoice proposal by selecting the approved retention invoice (Invoice proposal) from invoice proposals list, and then post it. Note: Invoice proposal workflow shall be configured to automate this activity.

Project management and accounting > Common > Project invoices > Invoice proposals

The financial impact of retention invoice is as follows:

Investigate Retainage withheld by customer

Customarily, the retainage percentage is more or less equal to the project profit margin. Therefore, the principal objectives of the retention process are;

a. The retention withholding amount should be visible and traceable throughout the project lifecycle.
b. The retention withholding amount should reflect accurately on apt reporting like project retention, customer statement, customer aging report and project cash flow.
c. The system should provide notification when a retention amount is due.

Below is a list of inquiries and reports that can fulfill the above objectives. The system provides the inquiry and reports to investigate the status of withheld retention amount by contract, by project, by customer and by invoice. 

Project management and accounting > Common > Projects > All Projects > Control > Customer retained payment

OR

Project management and accounting > Common > Projects > Project contracts > Control > Customer retained payment

OR

Project management and accounting > Inquires > Retention > Customer retained payment

Project management and accounting > Reports > Retention > Customer payment retention


Posted by: Burhan Sadiq, Dynamics Solutions, Solution Delivery Team | 08 November 2013

Tags: CRM, AX 2012, BI implementation advice


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