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Group 7

Arnab |

Rudra| Atul| Ankur

Case Facts
Kent Square Office Tower - construction project at Philadelphia
Owner wants Turner to release $500,000 in projects savings
Wants to reinvest in additional project upgrades Job is now 80% complete 5 months to completion 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 Managers have to protect the gross earning Once money is released unforeseen problems and developments can cut into the fee earnings of Turner. Tendency to hold contingencies till the last minute. Waiting too long can to release the savings can threated relationship with the client.

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.

Decision Problem
Determine how much savings can be safely released to the owner at this point
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 has already been released from contingency account Releasing $500,000 will solve two problems
Owner would get the spending money Turner would be able to book $100,000 in quarters earnings

Turners Business strategy


To make the owner as partner in managing the project: A way of getting repeat business

How does it differ from competitor?


Competitive Advantage
1. Ability to share accurate information with the owner during the progress of the project 2. Projecting itself as quality work (not competing on price 3. Use of GMP which leads to sharing of savings

Utilization of IOR
1. Used to identify the timing of the savings in the project 2. Identify the problems and options in the project

Success Reasons
1. Competition is not based solely on price 2. Turner shows that they are expert managers and can spend money efficiently 3. Selected knowledgeable clients to work with

4. Decentralized organization structure

Contingencies that could threaten Turners strategy viability


High running costs in making IOR, decision making and negotiation with owners

Contingencies pertaining to cost

Contingencies pertaining to 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

Not all cost engineers are equally adept at making IOR Need executives who have been exposed to all parts of business

Un natural and frequent changes in scope

Owners experience and knowledge in making decisions is critical.

Cost over runs that might occur after a decision taken under pressure of owner

Results in holding the funds for a long time and not informing the situation to owner

Pressure to not prematurely release savings and later dip into companys revenues

Lot of time being invested in updating IOR and decision making later on. This time is waste if IOR is not estimated properly. But,

Demands of owner to release savings prematurely thinking they could invest the savings and pressurizing the company

Evaluate the IOR system and related reports and meetings. Does the IOR system force managers and the project team to address the contingencies you identified in Question 2.

Indicated Outcome Report


Backbone of formal reporting systems
Critical line items, which Contingency holds influence major (C-holds) risk management Exposure holds (Edecisions holds) Cost report breaks down the full history of the job in detail

Heart of management system at Turner

Forward looking project management tool

Best efforts prediction at any point of time total expected cost of completed project earnings contribution of completed project Itemizes the dollar flow from owners to subcontractors and suppliers

Can be used as a reference to fine tune the strategy further

Need regular updates

IOR Review Meetings


Monitoring the overall performance of the staff and subcontractors, from the perspective of a project manager

Cooperating together to identify issues or/and alternatives

Realizing overall savings on the project

Project team anticipates financial and operational problems

Avoid any glitches or surprises during the project

Overall, IOR system as a tool, combined with related reports and meetings definitely force the managers and the whole project team to discuss and address all the contingencies

Advantages of IOR
Training

All the cost engineers are cross trained vigorously The quality of data is very high Appraisals of managers not tied to performance in the IOR Honest reporting without fear of hiding any bad news Early warnings about the critical tasks Helps in deciding where risk management is most critical Cost engineers do not report to any line management They can make rounds in various projects to get information

Appraisals

Warning

Reporting

The above advantages would help in solving the contingencies more effectively

Fund release prospects

Allocating $500000

Funds in E-hold: $471000 Construction contingency: $511000 Funds in C-hold: $328000 E-hold funds usually get spent on trade activities. Thus releasing Ehold is not wise Still 20% of the project is yet to be completed, there is still a good chance of problems occurring Overtime charges due to possible local strikes will be charged out of construction contingency

A portion of C hold can be released With 20% of work remaining, releasing all C-hold is not wise Overtime expenses @10000 per month for 7.2 months of work left Amount needed= $72000 Keeping a buffer of 50%, total amount needed in Construction contingency fund $108000 Amount remaining in Construction contingency= $403000 Releasing $97000 from C-hold, amount left in C-hold= $231000

Gary Thomsons views


To owner Senior management Project team

Releasing funds according to proportionate estimate from the Construction contingency fund Not a very accurate method, hence deviations may occur These deviations will have to shared between the company and the owner

Conservative approach undertaken in estimating holding funds Entire Construction contingency was not given off due to the possibility of strikes and a fair amount of work being left A buffer quantity of 50% was kept to support any deviations C- holds usually do not get spent, hence we are balancing the amount from C-holds

Due to limited availability of contingency funds, situations need to be monitored more closely All precautions should be taken to keep overshooting of costs to the minimum The smooth running of the project should be continued at any cost

THANK YOU