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 VP3 division
executive vice-presidents
Only 10% own work
force
Communication with
owner, architect, large
no. of suppliers and
subcontractors
Cost estimation by: own
estimating staff,
subcontractor inputs,
database of past
experience
GMP, turners earnings-
fixed
Gain and decrease in cost
methods
Case facts
Pressure from Top Management to release contingency to earnings.
Need to meet Turners 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
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
Project
Wants to reinvest in additional project upgrades
Unspent contingency reserve not likely to be
needed, therefore returned.
Kent Square Office Tower
One of the biggest construction project at
Philadelphia
Owner wants Turner to release $500,000 in
projects savings
The $500,000 Dilemma
To decide what
portion of $500,000 to
be released to Kent
Square
Once the earnings are
booked, it will look
bad if the division
falls short of
projection in the
subsequent quarter
Estimated bill of the
project $29 million
Remaining
Construction
Contingency
$511,000 = 1.8% of
total job cost
C holds = $328,000,
E holds =$471,000
The scope changes are
still taking place
$215,000 have
already been released
from contingency
account
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
New client- so cant
go back to him asking
for new money once
they return the
contingency
Its 80% complete and
not 95%
Turners 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
quarters
earnings

1. What is Turners business strategy? How does its strategy differ
from competitors?

Turners 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
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
Communication with
client
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
Turners strategy?

Cost
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
Time
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
Owners experience
and knowledge in
making critical
decisions
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
Pressure not to
release savings and
later reducing project
fee earnings
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?

Heart of management system at Turner
Backbone of formal reporting systems
Project executive, Jim Verzellas view: Real business is risk
management and IOR do that effectively
Project manager, Bill Rantanens view: Forward looking project
management tool
Senior manager, Division executive Vice President, Don
Kerstetters view: IOR system drives projection of quarterly
earnings and reported income to shareholders
IOR System
Ctd..
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
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)
C.E. dint report to P.E.,
or TOM, independent,
quasi- staff capacity
Philadelphia Senior Cost Engineer, Jayne Murphys view of IOR:
IOR updating process:
C.E. carefully reviews
variety of document
logs with new
transactions ( new
work orders by sub-
contractors)
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
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)
Team members
explained PE/manager
all significant changes
in project conditions
and Indicated Costs
and causes of those
changes
CE documented all
the revised partially
updated draft
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 prepared final
updated version
from IOR Review
meeting
Reviewed with
territorys senior
CE, team
management signs
Send new IOR to
TGM for final
approval
TGM- substantial
risk to cost, earnings
or client relations.
Additional iterations
before approving
I OR
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
Automated TFS:
summary of numbers
from every IOR in
monthly territory
earnings report
Eventually in the
corporate income
statement and
corporate earnings
projections
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
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
Reporting
Cost engineers do
not report to any
line management
They can make
rounds in various
projects to get
information
Precaution
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 owners 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 cant 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 Turners
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