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

Lot of time being

invested in
updating IOR
and decision
making later on.
This time is
waste if IOR is
not estimated
properly. But,
Not all cost
engineers are
equally adept
at making IOR
Need
executives who
have been
exposed to all
parts of
business

Demands of
owner to release
savings
prematurely thinking they
could invest the
savings and
pressurizing the
company
Un natural and
frequent
changes in scope

Owners experience and knowledge in

making decisions is critical.

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

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

Contingencies pertaining to time

Cost over runs that

might occur after a
decision taken
under pressure of
owner

Contingencies pertaining to cost

High running costs

in making IOR,
decision making
and negotiation
with owners

Pressure to not prematurely release savings and later

dip into companys revenues

Contingencies that could threaten Turners strategy viability

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)

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

Cost report
breaks down
the full
history of the
job in detail

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

Need regular
updates

IOR Review Meetings

Cooperating
together to
identify issues
or/and
alternatives

Project team
anticipates financial
and operational
problems

Realizing overall
savings on the
project

Avoid any glitches or

surprises during the
project

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

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

Appraisals

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

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

The above advantages would help in solving the contingencies more effectively

Fund release prospects

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

Allocating $500000

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