Group2 Turner 1

5/19/2018 Group2 Turner 1

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Group2

Rupa Murudkar 092

Ankit Verma 185

Ankur Zutshi 186

Manoj Kumar 210

Chandan Bharambe 078


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Introduction: Turner Construction Company

28 territories, eachheaded by a TGM

Autonomy to TGM, improle: prospecting for new

work

Project managers---3-6project executives(eachheaded 5-6 projects at atime)---TOM-- TGM

1/5 VP3 divisionexecutive vice-presidents

Only 10% own workforce

Communication withowner, architect, largeno. of suppliers and

subcontractors

Cost estimation by: ownestimating staff,

subcontractor inputs,database of past

experience

GMP, turners earnings-fixed

Gain and decrease in costmethods


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Case facts

Pressure from Top Management to release contingency to earnings.

Need to meet Turners quarterly corporateearnings projections

Because of loss of sale of a developmentbuilding, division has to come up withadditional$200 000 earnin s in the uarter

Savings Participation Contract

Once a contingency is released as savings it is

shared- 75% to the owner + 25% for Turner asadditional project earning

Once money is released unforeseen problems and

developments can cut into the feeearnings ofTurner

Project

Wants to reinvest in additional project upgradesUnspent contingency reserve not likely to be

needed, therefore returned.

Kent Square Office Tower

One of the biggest construction project atPhiladelphia

Owner wants Turner to release $500,000 inprojects savings


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The $500,000 Dilemma

To decide whatportion of $500,000 to

be released to KentSquare

Once the earnings arebooked, it will lookbad if the division

falls short ofprojection in thesubsequent quarter

Estimated bill of theproject $29 million

RemainingConstructionContingency

$511,000 = 1.8% oftotal job cost

C holds = $328,000,

E holds =$471,000

The scope changes arestill taking place

$215,000 havealready been released

from contingencyaccount

Possible local strike in oneof the trades, legitimateneed for extra clean up,

several contractors workingon the same floor which can

get messy- needs E holdsfor that

New client- so cantgo back to him askingfor new money once

they return thecontingency

Its 80% complete andnot 95%

Turners reputation onstake


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Releasing $500,000 will solve two problems

Owner would getthe spending

money

Turner would be

able to book$100,000 in

quartersearnings


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1. What is Turnersbusiness strategy? How does its strategy differ

from competitors?

Turners Business Strategy: To makethe owner as partnerin managing the project

thus a way of getting repetitive business opportunity from the same client

Prediction at anypoint of time thetotal expected costand earningscontribution of acompleted project

Identify theproblems andoptions in theproject

IOR

Ability to shareaccurate informationwith the owner duringthe progress of theproject

Projecting itself asquality work and notcompeting on price

Use of GMP whichleads to sharingof savings

Communication with

client

Turner shows thatthey are expertmanagers and canspend moneyefficiently

Selected

knowledgeableclients to workwith

Decentralizedorganizationstructure

Organization


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2. What contingencies could threaten or invalidate the viability of

Turners strategy?

Cost

After releasing thesavings somesituation like strike,

overtime demand,etc might occur

Cost overruns thatoccur becauseof improper costestimates whichhappen because ofdifficulty inestimating

Time

Lot of time beinginvested inupdating IOR and

decision makinglater on. This timeis waste if IOR isnot estimatedproperly

Not all costengineers areequally adept atmaking IOR

Needs executiveswho have beenexposed to all partsof business

Owners experienceand knowledge in

making criticaldecisions

Demands of ownerto release savingsprematurely -

thinking they couldinvest the savingselsewhere and thuspressurizing thecompany leads tounexpectedchanges in scope

Pressure not torelease savings and

later reducing projectfee earnings

This leads toholding the fundsfor a long time and

not informing thesituation to owner


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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 Verzellasview: Real business is riskmanagement and IOR do that effectively

Project manager, Bill Rantanensview: Forward looking projectmanagement tool

Senior manager, Division executive Vice President, DonKerstettersview: IOR system drives projection of quarterly

earnings and reported income to shareholders

IOR System


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Ctd..

Each quarterly update,extensive series of

discussions andmeetings happen with

all members of a projectteam included

Updating of exposureinvolves intuition and

gut feeling

1 or 2 months consumedto do detailed work by

estimators and costengineers to develop

new IOR for a new job

After that, quarterlyupdating process takes

3-4 weeks by cost engg(3 projects at a time)

C.E. dintreport to P.E.,or TOM, independent,quasi- staff capacity

Philadelphia Senior Cost Engineer, Jayne Murphysview of IOR:


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IOR updating process:

C.E. carefully reviewsvariety of document

logs with newtransactions ( new

work orders by sub-contractors)

For specific answers,the CE made therounds among

project tem memberswho worked on site

CE- industry logisticsand project specificconsiderations:costof uncompleted work

and interpret team

members assumptionsand explanations

After this updation,available toeveryone

for a formal IORreview meeting- Ledby PE- included the

project

superitendent,project engg, CE,

accountant

Assistant engineersattended to review

their particular

trade(eg. Masonry)

Team membersexplained PE/managerall significant changes

in project conditionsand Indicated Costsand causes of those

changes

CE documented all

the revised partiallyupdated draft

Discussion focusedon major variances(

versus previous IOR)and on E-holds which

tended to be morecontroversial than

committed subcontractworks and activities in

progress

CE prepared finalupdated version

from IOR Reviewmeeting

Reviewed withterritorys senior

CE, teammanagement signs

Send new IOR to

TGM for finalapproval

TGM- substantialri sk to cost, earn ingsor cli ent r elations.Additional i terationsbefor e approving

IOR

Then published byterritory cost dept

Copies- group VP, hiscost staff, the division

executive VP andcorporate cost dept

Problems withproject, unusual forAl McNeil, Chairmanof Turner, to discussdetails contained in

IOR

Automated TFS:summary of numbers

from every IOR inmonthly territoryearnings report

Eventually in thecorporate income

statement andcorporate earnings

projections


11/14

Advantages of IOR to help solving the contingencies more effectively

Training

All the costengineers arecross trained

vigorously The quality of

data is very high

Appraisals

Appraisals ofmanagers not tiedto performance in

the IOR Appraisals based

on performanceof individualemployee andirrespective of theproject

Hence, honestreporting withoutfear of hiding anybad news

Reporting

Cost engineers donot report to anyline management

They can makerounds in variousprojects to getinformation

Precaution

Early warningsabout the criticaltasks

Helps in decidingwhere riskmanagement ismost critical


12/14

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


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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 cantgoback to him asking for new moneyonce they return the contingency

We have maintained Constructioncontingency- 2.5% which will

serve as a bottom line reserve forlater on changes

C hold has not been compromisedto take care of uncertainty due tolabor strike, scope developmentetc. along with CC

Earning for the company=366,000*.25*.8= $73,200

Thus contributing 36.6% fromone territory

These measures are taken in orderto maintain good clientrelationship and Turnersreputation, which are our primeobjectives

The owners of Kent square

Amount Given to owner=366,000 (73.2% of what hedemanded)

Further exceeding the

amount given will not be infavor of owner as we willloose all buffer which hasbeen kept for any uncertainty

Hence for timely completionof the project, we haveestimated the releasedamount very conservatively

Project team (i.e. Jim, Bill)

Due to limited availability ofcontingency funds, situations needto be monitored more closely

All precautions should betaken tokeep overshooting of costs to theminimum

The smooth running of the projectshould be continued at any cost


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Documents

Group2 Turner 1