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Abstract

This case highlights the decision dilemmas in management control system of a


Construction Project Organisation.
Case states the decision dilemma of Turners Territory General manager for
release of contingency reserves.
He states I received a call this morning, from the owner of one of our
biggest Philadelphia construction projects, the new Kent Square office
tower. The owner wants us to release $500,000 in project savings so
that the money will be available to him to reinvest in additional project
upgrades. Because the job is now 80% complete, he assumes the
unspent contingency reserve is not likely to be needed and should
therefore be returned
He faces the pressure from top management for releasing the contingency to
earning, because of loss incurred in sale of development building.
The contact with owner is of saving participation type where Turner will have to
share 75% of its saving to owner and only 25% of saving can be transferred to
earning of turner.
Project manager and superintendent wants to keep construction contingency to
take safety against any unpleasant things happen in remaining 20% job.
Dilemma is that, still 20% of project is balance to complete and if turner
releases the contingency saving it shares 75% to the owner and 25 % goes to
turner as project earning and in case if anything goes wrong in the project, it
has to dip in their fee to finish the job and compensate cost overrun.
At the same time, holding more can threaten relationship with client. And also
Pressure from top management and boss to convert contingency in earnings to
meet quarterly corporate earnings projection.
Above all, this is a new client for turner. Relationship is a key to develop and
maintain.
This case highlights the importance of interactive controls.
About Turner construction
During 1980s Turner Construction Company, Headquartered in New
York City, was the largest building Contractor and construction
management company in United States.
Offices in 35 cities
Turner served virtually all non-residential construction markets.
During 1989, Turner managed 550 active projects and completed
construction valued at $3.6 billion.
Domestic operation divided into 28 territories.
Decentralized structure. Headed by TGM.

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Turner construction project lasted one to three years, valued $10 to


$25 million.
Turner typically uses 10% of its own staff and 90% sub-contractors.
Turner negotiated by using its own estimating staff, subcontractor
input and past experience database to estimate project costs.
Owner compensated Turner on cost plus basis, Up to GMP.
Turners fee (Gross earning) also stipulated and fixed in contract.
For incentive on careful cost management, any savings between GMP
and actual cost usually shared with owner as per contract terms of
saving participation.
Excess costs needs to be absorbed exclusively by Turner, reducing
project fee earning.
Organisation structure of territory
Each TGM has Considerable autonomy to run his territory as an independent
business and to look for new business.
Corporate Executive Group
Three Divisional Executive VP
Five Groups VP
TGM reports to 1 of 5 VP
TOM
Three to Six Project Executive
Looks 4 to 5 project at a time
Project Manager

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Project management, financial control and IOR system


Project Executives view
We Produce IOR for every construction project on quarterly basis with six
week update or at least once in each month as informal update. The TFS
consolidate IOR on monthly basis at every level up in the organisation all
the way to corporate.
Project executives view in major risk
Contingency hold and exposure hold is important for projects
unprecedented risk.2.5% of total project cost that serves as bottom line
reserve against scope change and cost overrun
The hold and construction contingency represents un committed buffer
dollar.
Project executives view in managing the project
Ability to share and develop accurate information with the owner while
project in progress.
Expert manage their money efficiently
We will share all of IOR cost details with the owner
Financial details must be update constantly
Project executives view in managing the project
The project is $29 million.
The job is 80% complete and our remaining Construction Contingency is $
511.000 or 1, 8% of total job costs.
We also have $328.000 in C holds and $ 471.000 in E holds, with five
months to completion.
We can release $500.000 from the Contingency because the job has been
going so smoothly.
Project Executives View to bring $500.000 issue
Project Managers view
"IOR system is more forward-looking than the historical accountingoriented systems of most of our competitors... The team meetings create
overlap knowledge of the job, so that nothing falls through the cracks..
IORs have to be updated regularly."

IOR System:

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Turners business is risk management and IOR systems do that effectively.


An Indicated Outcome Report is a best effort prediction at any point in time
of the total expected cost and earning contribution of a completed project.
The IOR system is the backbone of most of Turners formal Reporting system.

The IOR cover letter


IOR Cover Letter gives territory and corporate management a concise outline of
financial position on project.
Focus on changes in the IOR detail form prior report.
IOR Cover Letter Contents
Financial Summary of project earning and volume
Current earning-to cost ratio
Description and schedule of project milestones
Description of contract agreement with owner
Estimated dollar volume of completed project (Explanation of changes)
Discussion of major changes in earnings
Discussion of major changes in Direct & Indirect Costs
Breakdown of Uncommitted dollars (type of Contingencies, Unbought item, etc)

IOR cover purpose


Evaluation of the overall level of construction contingency holds.
Giving consideration to the type of owner, experience of job staff, type of
architect and subcontractors, and state of contract document

The IOR updating process


The value Of the IOR system depends on the quality of the data it contains and
the IOR updating process provides the necessary thoroughness.

Advantage of IOR:
Training:
All the cost engineers are cross trained vigorously

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The quality of data is very high


Appraisals
Appraisals of managers not tied to performance in the IOR
Honest reporting without fear of hiding any bad news
Warning:
Early warnings about the critical tasks
Helps in deciding where risk management is most critical
Reporting
Cost engineers do not report to any line management
They can make rounds in various projects to get information
Senior managements view
The majority of the senior team has worked at one time in the Cost (IOR)
Department, So they have learned a real respect for the cost end of the
business.

The $500,000 Dilemma


The ultimate decision would be made by the TGM, TOM, and project executive.
Conclusion
Concerns and consideration
Possibility of local strike in one of the trades Overtime Labor.
The architect tends to submit a constant flow of new drawing and
specification changes release of $500.000 Construction Contingency.
The owner psychology and motives.
Help to build and maintain good client relationship.
Help to determine exactly how the information shared with each client
The bottom line, $5000.000 released, Should discuss this with Gary
Thompson and few other people beforehand
Decision Made
Produce a final IOR-style cost report that breaks down the whole
history of the job in detail and hand it to Gary Thompson.
If Gary say YES

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The owner would get spending money he is asking for Turners 25%
share of the savings would help to offset a loss that has been
projected.
Conclusion
Turner should release contingency so that keep relationship with owner
Kent Square office tower.
Construction contingency can be released or partially can be released
by Turner to build good relationship and to develop trust with new
Owner.
Explain Owner about concerns in pulling all the money from the
Construction Contingency as there are still five months left before the
project is complete.
There are still risks such as possible strike and clean-up risk that will
need to be addressed and if all funds were released just from the
Construction Contingency reserve any unknown events would have to
be covered.
Learning from the case

The case highlights the use of IOR system as a tool for management control.
Case also highlights about the interactive controls which

1. Important recurring agenda for top managers


2. Focus of attention by operating managers throughout organization
3. Face-to-face meetings
4. Continual challenge and debate of data, assumptions, and action plants

Definitions

Construction Contingency:
A contingency is a predetermined amount or percentage of the contract held
for unpredictable changes in the project. A contingency is a helpful risk
management tool that financially prepares owners for addressing risk within
the project.

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Contingency Reserve: An appropriation of surplus or retained earnings that


may or may not be funded, indicating a reservation against a specific or
general contingency.

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