This is an Engineering Management Assignment.The insrtructionf for the assignments are given in the case study 1 assignment questions file.All answers should be written within 4 pages.References should be added.
Turner Construction Company: Project Management Control Systems Harvard Business School 9-190-128 Rev. October 18, 1999 Hilary Weston prepared this case under the supervision of Professor Robert Simons as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1990 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1 Turner Construction Company: Project Management Control Systems 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. Gary Thompson, Turner’s Philadelphia territory general manager, went on to explain the resulting dilemma: The project manager and superintendent on the job want to maintain the Construction Contingency for several more months. They want to be financially prepared for potential exposures they’ve identified. The contract for this job calls for savings participation. That means that once we release a contingency as savings, we will share it with the owner, in this case keeping 25% for ourselves as additional project earnings and returning 75% to the owner. Our managers are trained to be conservative and have been threatened with their lives to protect our gross earnings on each job. If we release contingency dollars to an owner prematurely, we may never see the money again, regardless of what unforeseen problems and developments happen on that job. Then we are forced to dip into our fee earnings to complete the job. Because of these pressures, my people have a tendency to want to hold contingencies until the very last minute. But if we wait too long to release the savings, it can threaten our relationship with the client. This timing issue is one of the things I worry about the most; it can really bite you sometimes. In addition to pressure from the owner, I’m also feeling pressure from division management to release the contingency to earnings. Top management needs to meet Turner’s quarterly corporate earnings projection. And because of a loss on a sale of a Turner Development building, corporate called on our division executive VP to try to come up with an additional $200,000 earnings for this quarter. Les Shute—my boss—called me to see how much my territory could contribute. Do N ot C op y or P os t This document is authorized for educator review use only by VIK KORTIAN, Macquarie University until Jan 2021. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860 190-128 Turner Construction Company: Project Management Control Systems 2 I’ve asked Jim Verzella, the project executive on the Kent Square building, to review the project’s most recent IOR [Indicated Outcome Report] and talk to the project team to determine how much savings they can comfortably release to the owner at this point. I want to have an answer by the end of the week, when we have the next OAT [Owner, Architect, Turner] meeting with the Kent Square project representative. Les Shute is coming down at the end of the week for his monthly Territory Review meeting. I need to have an answer for him on what additional amount our territory can book in earnings for this quarter. To be safe, I can tell him I have no additional savings to release as earnings. But I’d rather not have to do that. So, I’ll spend a good part of today picking the brains of my five project executives to see how much contingency each of them can release from their current projects. I have to be careful, because once we book earnings, it looks very bad if we fall short of projections in a subsequent quarter—it looks bad to senior management, to our auditors, and ultimately to the stockholders. We never want to release a contingency and then later discover that without the contingency we need to dip into our fee to finish the job. Company Background and Structure1 During the late 1980s, Turner Construction Company, headquartered in New York City, was the largest general building contractor and construction management company in the United States. Through its offices in over 35 cities, Turner served virtually all nonresidential construction markets, including commercial, hospital, manufacturing, education, hotel, airports, advanced technology, and the public sector. During 1989, Turner managed 550 active projects and completed construction valued at $3.6 billion. Operating income for the construction work completed was $35.6 million. Also in 1989, the company secured $3.2 billion of new business. Turner’s domestic operation was divided into 28 territories, each headed by a territory general manager (TGM). Top management gave each TGM considerable autonomy to run his territory as an independent business and an important role of the TGM was prospecting for new work. Within the decentralized structure, each TGM reported to one of five group vice presidents who in turn reported to three division executive vice presidents (EVPs) all of whom were members of the Corporate Executive Group. Exhibit 1 depicts the corporate organizational structure. Construction operations were managed on a project by project basis. Exhibit 2 illustrates the composition of a typical project team as well as overall territory structure. A territory’s operations manager (TOM), who reported to the TGM, assembled project teams from his territory’s staff based on specific project requirements, staff availability, and employee development objectives. (The TOM’s function was similar to that of a chief operating officer, while the TGM functioned more like a territory CEO.) Reporting to the TOM were three to six project executives who each headed four or five projects at a time. Project executives were assisted by project managers who were assigned to manage each large project. A typical construction project at Turner lasted one to three years and was valued at $10 million to $25 million. Once awarded a job, Turner management planned and scheduled construction, procured the required materials and manpower, awarded subcontracts, and managed overall operations. Turner typically performed less than 10% of the contracted work using its own 1As an aid to the reader, a Glossary of abbreviations used in the case is provided on page 14. Do N ot C op y or P os t This document is authorized for educator review use only by VIK KORTIAN, Macquarie University until Jan 2021. Copying or posting is an infringement of copyright.
[email protected] or 617.783.7860 Turner Construction Company: Project Management Control Systems 190-128 3 staff. Throughout the life of a project, the Turner project team maintained on-going communications with the owner and architect, as well as with a large number of subcontractors and suppliers. In most cases, Turner negotiated the terms of each contract with the property owner, using its own Estimating staff, subcontractor input, and database of past experience to estimate project costs. The owner usually compensated Turner on a cost-plus basis, up to the guaranteed maximum price (“GMP”) stipulated in the contract. Turner’s fee for managing the project (i.e., gross earnings) was also stipulated and fixed in the contract. To provide incentives for careful cost management, any savings between the GMP and actual costs were usually shared with the owner according to savings participation terms specified in the contract. Costs in excess of GMP were absorbed exclusively by Turner, reducing project fee earnings. Project Management, Financial Control, and the IOR System A Project Executive’s View After meeting with Philadelphia TGM Thompson, the casewriter met with Jim Verzella, the Philadelphia project executive in charge of the Kent Square building. When the casewriter mentioned the “$500,000 question” currently facing him, Verzella explained its significance and the context of control systems in which it would be resolved: To appreciate how we can find $500,000 for the owner, you first need to understand our IOR [Indicated Outcome Report] system, which was first introduced in the 1920s. Even though Turner builds buildings, our business is really risk management, and the IOR system allows us to do that effectively. The Philadelphia office in particular is very proactive in the way we use the IOR system and other controls. Other companies may have financial tracking systems, but no one spends as much time on it as us. The IOR is really the heart of our management system at Turner. It raises the flags so that I know what questions to ask. We produce an IOR for every construction project on a quarterly basis, with six-week updates. The Turner Forecasting System (“TFS”) consolidates IORs on a monthly basis, in less detail, at every level up the organization all the way to corporate. The details of the system may appear confusing to an outsider, but it is actually very simple and it assists all of us in doing our jobs. The IOR system is the backbone of most of our other formal reporting systems. (See Exhibit 3 for a list of the most important management reports and their relationship to the IOR.) Basically, an IOR is a best-efforts prediction at any point in time of the total expected cost and earnings contribution of a completed project. It itemizes the maximum dollar commitment from the owner on the left side of the page and the corresponding dollars that will flow out to subcontractors and suppliers on the right side. Any difference in the two sides represents savings or cost overruns that directly affect our earnings on the completed project. More specifically, the left side of the IOR—which is based on our original bid and contract—is broken down into expenditures for which reimbursement from the owner is assured (i.e., included in the GMP contract) and those for which it is not yet certain (i.e., scope or