Group2 Turner 1

Group2 Rupa Murudkar 092 Ankit Verma 185 Ankur Zutshi 186 Manoj Kumar 210 Chandan Bharambe 078

Introduction: Turner Construction Company 28 territories, each headed by a TGM

Autonomy to TGM, imp role: prospecting for new work

Project managers---3-6 project executives(each headed 5-6 projects at a time)---TOM-- TGM— 1/5 VP—3 division executive vice-presidents

Cost estimation by: own estimating staff, subcontractor inputs, database of past experience

Communication with owner, architect, large no. of suppliers and subcontractors

Only 10% own work force

GMP, turner’s earningsfixed

Gain and decrease in cost methods

Case facts Kent Square Office Tower One of the biggest construction project at Philadelphia

Owner wants Turner to release $500,000 in projects savings

Project Wants to reinvest in additional project upgrades

Unspent contingency reserve not likely to be needed, therefore returned.

Savings Participation Contract Once a contingency is released as savings it is shared- 75% to the owner + 25% for Turner as additional project earning

Once money is released unforeseen problems and developments can cut into the feeearnings of Turner

Pressure from Top Management to release contingency to earnings. Need to meet Turner’s quarterly corporate earnings projections

Because of loss of sale of a development building, division has to come up with additional$200,000 earnings in the quarter

The $500,000 Dilemma

To decide what portion of $500,000 to be released to Kent Square

C holds = $328,000, E holds =$471,000

Once the earnings are booked, it will look bad if the division falls short of projection in the subsequent quarter

The scope changes are still taking place

New client- so can’t go back to him asking for new money once they return the contingency

Estimated bill of the project $29 million

$215,000 have already been released from contingency account

Its 80% complete and not 95%

Remaining Construction Contingency $511,000 = 1.8% of total job cost Possible local strike in one of the trades, legitimate need for extra clean up, several contractors working on the same floor which can get messy- needs E holds for that

Turner’s reputation on stake

Releasing $500,000 will solve two problems

Owner would get the spending money

Turner would be able to book $100,000 in quarter’s earnings

1. What is Turner’s business strategy? How does its strategy differ from competitors? Turner’s Business Strategy: To make the owner as partner in managing the project thus a way of getting repetitive business opportunity from the same client

• Prediction at any point of time the total expected cost and earnings contribution of a completed project • Identify the problems and options in the project IOR

Communication with client • Ability to share accurate information with the owner during the progress of the project • Projecting itself as quality work and not competing on price • Use of GMP which leads to sharing of savings

• Turner shows that they are expert managers and can spend money efficiently • Selected knowledgeable clients to work with • Decentralized organization structure Organization

2. What contingencies could threaten or invalidate the viability of Turner’s strategy?

Cost

Time

• After releasing the savings some situation like strike, overtime demand, etc might occur • Cost overruns that occur because of improper cost estimates which happen because of difficulty in estimating

• Lot of time being invested in updating IOR and decision making later on. This time is waste if IOR is not estimated properly • Not all cost engineers are equally adept at making IOR • Needs executives who have been exposed to all parts of business

Owner’s experience and knowledge in making critical decisions

Pressure not to release savings and later reducing project fee earnings

• Demands of owner to release savings prematurely thinking they could invest the savings elsewhere and thus pressurizing the company leads to unexpected changes in scope

• This leads to holding the funds for a long time and not informing the situation to owner

3. Evaluate the IOR system and related reports and meetings. Does the IOR system force managers and project team to address the contingencies you have identifies in previous question? IOR System Heart of management system at Turner

Backbone of formal reporting systems

Project executive, Jim Verzella’s view: Real business is risk management and IOR do that effectively

Project manager, Bill Rantanen’s view: Forward looking project management tool Senior manager, Division executive Vice President, Don Kerstetter’s view: IOR system drives projection of quarterly earnings and reported income to shareholders

Ctd.. Philadelphia Senior Cost Engineer, Jayne Murphy’s view of IOR: Each quarterly update, extensive series of discussions and meetings happen with all members of a project team included

Updating of exposure involves intuition and gut feeling

C.E. din’t report to P.E., or TOM, independent, quasi- staff capacity

1 or 2 months consumed to do detailed work by estimators and cost engineers to develop new IOR for a new job

After that, quarterly updating process takes 3-4 weeks by cost engg( 3 projects at a time)

IOR updating process: After this updation, available to everyone for a formal IOR review meeting- Led by PE- included the project superitendent, project engg, CE, accountant

Assistant engineers attended to review their particular trade(eg. Masonry)

For specific answers, the CE “made the rounds” among project tem members who worked on site

CE- industry logistics and project specific considerations: cost of uncompleted work and interpret team members assumptions and explanations

Reviewed with territory’s senior CE, team management signs

CE prepared final updated version from IOR Review meeting

Discussion focused on major variances( versus previous IOR) and on E-holds which tended to be more controversial than committed subcontract works and activities in progress

CE documented all the revised partially updated draft

Team members explained PE/manager all significant changes in project conditions and ‘Indicated Costs” and causes of those changes

Send new IOR to TGM for final approval

TGM- substantial risk to cost, earnings or client relations. Additional iterations before approving IOR

Then “published” by territory cost dept

Copies- group VP, his cost staff, the division executive VP and corporate cost dept

Problems with project, unusual for Al McNeil, Chairman of Turner, to discuss details contained in IOR

Eventually in the corporate income statement and corporate earnings projections

Automated TFS: summary of numbers from every IOR in monthly territory earnings report

C.E. carefully reviews variety of document logs with new transactions ( new work orders by subcontractors)

Advantages of IOR to help solving the contingencies more effectively

Training • All the cost engineers are cross trained vigorously • The quality of data is very high

Appraisals

Reporting

Precaution

• Appraisals of managers not tied to performance in the IOR • Appraisals based on performance of individual employee and irrespective of the project • Hence, honest reporting without fear of hiding any bad news

• Cost engineers do not report to any line management • They can ‘make rounds’ in various projects to get information

• Early warnings about the critical tasks • Helps in deciding where risk management is most critical

Amount to be released                  

Kent square project estimated cost= $29,000,000, CC = 511,000 (CC= 1.8%), C-hold= 328,000 and E- hold= 471,000, 5 months remaining, Total= CC+CH= 839,000 = 2.9% of $29,000,000( this represents we are in a good position) Going smooth so asked $500,000 Already released $215,000 OCC to owner’s saving pool We are in a great shape with good buffer Gary tends to be conservative in his projections Need to understand owner Total project cost (adjusted estimate) = $29,000,000 20% remaining = 29,000,000*.20= $5,800,000 Total E hold= $471,218 Total C hold= $328,000 Total CC = $511,000 2.5% of 5,800,000= $145,000 Thus we can easily release amount= $366,000 Earning for the company= 366,000*.25*.8= $73,200 Thus contributing 73200/200= 36.6% from one territory Amount Given to owner= 366,000 (73.2% of what he demanded)

Assumptions:  Proportion method is valid for cost estimates  Any fluctuation due to labor strike, would be addressed by $145,000+C-hold

4. If you were Gary Thompson, what would you say about the $50,000 contingency to:

Senior management, (Les, Don) • The client is new and so can’t go back to him asking for new money once they return the contingency • We have maintained Construction contingency- 2.5% which will serve as a bottom line reserve for later on changes • C hold has not been compromised to take care of uncertainty due to labor strike, scope development etc. along with CC • Earning for the company= 366,000*.25*.8= $73,200 • Thus contributing 36.6% from one territory • These measures are taken in order to maintain good client relationship and Turner’s reputation, which are our prime objectives

The owners of Kent square • Amount Given to owner= 366,000 (73.2% of what he demanded) • Further exceeding the amount given will not be in favor of owner as we will loose all buffer which has been kept for any uncertainty • Hence for timely completion of the project, we have estimated the released amount very conservatively

Project team (i.e. Jim, Bill) • Due to limited availability of contingency funds, situations need to be monitored more closely • All precautions should betaken to keep overshooting of costs to the minimum • The smooth running of the project should be continued at any cost