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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 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.
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 quarter’s earnings
Turner’s 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 Success Reasons
Utilization of IOR
Advantage

1. Ability to share 1. Used to identify 1. Competition is not


accurate information the timing of the based solely on price
with the owner savings in the project 2. Turner shows that
during the progress 2. Identify the they are expert
of the project problems and managers and can
2. Projecting itself as options in the project spend money
quality work (not efficiently
competing on price 3. Selected
3. Use of GMP which knowledgeable
leads to sharing of clients to work with
savings 4. Decentralized
organization
structure
Contingencies that could threaten Turner’s strategy viability
High running costs
in making IOR,
decision making
and negotiation

Pressure to not prematurely release savings and later


with owners
Results in
Cost over runs that
holding the
might occur after a Contingencies pertaining to cost funds for a long
decision taken
time and not Lot of time being
under pressure of

dip into company’s revenues


informing the invested in
owner

Contingencies pertaining to time


Demands of

Owner’s experience and knowledge in


situation to updating IOR
• after releasing the owner and decision owner to release
savings some making later on. savings

making decisions is critical.


situation like This time is prematurely -
strike, overtime waste if IOR is thinking they
demand etc might not estimated could invest the
occur properly. But, savings and
• Cost overruns pressurizing the
• Not all cost company
that occur engineers are
because of Un natural and
equally adept
improper cost frequent
at making IOR
estimates which changes in scope
happen because • Need
of difficulty in executives who
estimating have been
exposed to all
parts of
business
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
influence major
• Contingency holds
risk (C-holds)
“Heart of management management • Exposure holds (E-
system at Turner” decisions holds)

Cost report
“Forward looking project breaks down
management tool” the full
history of the
job in detail

• Can be used as a
Best efforts prediction at reference to fine Need regular
any point of time tune the strategy updates
further
• total expected cost of completed
project
• earnings contribution of completed
project
• Itemizes the dollar flow from owners
to subcontractors and suppliers
IOR Review Meetings

Monitoring the
overall
Cooperating
performance of
together to Realizing overall
the staff and
identify issues savings on the
subcontractors,
or/and project
from the
alternatives
perspective of a
project manager

Overall, IOR system as


a tool, combined with
related reports and
Project team
Avoid any glitches or meetings definitely
anticipates financial
surprises during the force the managers
and operational
project and the whole project
problems
team to discuss and
address all the
contingencies
Advantages of IOR
• All the cost engineers are cross trained vigorously
Training • The quality of data is very high

• Appraisals of managers not tied to performance in the IOR


Appraisals • Honest reporting without fear of hiding any bad news

• Early warnings about the critical tasks


Warning • Helps in deciding where risk management is most critical

• Cost engineers do not report to any line management


Reporting • They can ‘make rounds’ in various projects to get information

The above advantages would help in solving the contingencies more effectively
Fund release prospects Allocating $500000

• A portion of C hold can be


• Funds in E-hold: $471000 released
• Construction contingency: • With 20% of work remaining,
$511000 releasing all C-hold is not
• Funds in C-hold: $328000 wise
• E-hold funds usually get spent on • Overtime expenses @10000 per
trade activities. Thus releasing E- month for 7.2 months of work left
hold is not wise • Amount needed= $72000
• Still 20% of the project is yet to be • Keeping a buffer of 50%, total
completed, there is still a good amount needed in Construction
chance of problems occurring contingency fund $108000
• Overtime charges due to possible • Amount remaining in Construction
local strikes will be charged out of contingency= $403000
construction contingency • Releasing $97000 from C-hold,
amount left in C-hold= $231000
Gary Thomson’s views

To owner Senior management Project team

• Releasing funds • Conservative approach • Due to limited availability


according to undertaken in estimating of contingency funds,
proportionate estimate holding funds situations need to be
from the Construction • Entire Construction monitored more closely
contingency fund contingency was not • All precautions should be
• Not a very accurate given off due to the taken to keep
method, hence possibility of strikes and overshooting of costs to
deviations may occur a fair amount of work the minimum
• These deviations will being left • The smooth running of
have to shared between • A buffer quantity of 50% the project should be
the company and the was kept to support any continued at any cost
owner deviations
• C- holds usually do not
get spent, hence we are
balancing the amount
from C-holds
THANK YOU