TEANECK CONSTRUCTION COMPANY

Teaneck is a small organization with 90% of its peso volume obtained from contracts for municipal work.
Management decided to submit a bid for the construction in April of a mile-long extension to the main
sewer system in a nearby town which until now has used septic tanks. The bidding is expected to be
competitive because whoever gets this contract will have some advantage in obtaining a contract to be
awarded by the town later in the year worth about P50 million. In order to submit the most competitive bid
possible, the project managers of Teaneck decided to evaluate the alternatives of using one, two or three
work shifts.
Table 1 shows time and cost estimates of Teanecks engineers. The trunk sewer extension is to be laid in a
tunnel for 1/3 its length; the remaining 2/3 is to be constructed in trenches. To build the tunnel, a primary
shaft must be excavated first, then the secondary shafts can be driven and the tunnel can be dug
simultaneously. The trench is to be started at the same time as the primary shaft. Another crew of workers
follows the trench workers, laying pipes, pouring concrete and refilling trenches as far as they have been
excavated. The excavators lose no time as a result of this follow up. A third group would be performing a
similar function in the tunnel.
Teanecks direct labor is hired from union pools. There is a strong chance that the local Excavators Union
will strike on the projects inception date which may seriously affect its profitability. At a meeting of the
project managers, there was a consensus to use 80% probability of such a strike for planning purposes.
With a strike, direct costs would remain unchanged, since the issue involved was not one of wages; but
indirect costs would accrue for the duration of the strike at the same daily rate as indicated in Table 1.
General and administrative costs are put at 40% of the sum of direct and indirect costs. Normally, Teaneck
aims at making a profit equal to 10% of total costs.
There was also a recognized need to develop some kind of estimate to describe the probability of the
strikes duration. With a great deal of misgiving, the project managers came up with the following
guesses:
Length of the strike in days
Probability of a strike of n days, on condition that a strike occurs

20
0.25

30
0.25

40
0.50

You are the project manager assigned. The president and his two executive vice-presidents have asked
you for a detailed recommendation, including the exact bid to be submitted.

TABLE 1
ACTIVITY
A Move in machinery/equipment
B Excavate primary shaft
C Excavate secondary shafts
D Excavate trenches
E Excavate tunnel
F Backfill (trenches only)
G Pipelaying in trenches
H Pipelaying in tunnel
J Pour concrete in trenches
K Pour concrete in tunnel
L Landscape
M Move out
Total Indirect Costs

One Shift

Two Shifts

Days
Pesos
12 150,000
12 347,500
60 312,500
300 1,685,000
305 1,807,500
50
50,000
50 375,000
50 275,000
70 570,000
60 550,000
10 100,000
5
25,000
P7,000/day

Days
Pesos
6 165,000
12 347,500
24 330,000
150 2,125,000
155 1,955,000
25
75,000
25 410,000
25 285,000
35 582,500
30 562,500
8 145,000
3
37,500
P8,000/day

Three Shifts
Days
Pesos
4 180,000
12 347,500
12 347,000
100 2,250,000
105 2,000,000
17 100,000
17 445,000
15 300,000
25 592,500
20 575,000
6 150,000
2
50,000
P9,000/day