TURNER CONSTRUCTION COMPANY: PROJECT MANAGEMENT CONTROL SYSTEMS

KEYFACTS

1. Owner of Kent Square Office tower (construction project at Philadelphia) has asked Turner to release the contingency amount of $500,000 in project savings as 80% of the work is done and only 5 months is remaining so this unspent amount is unlikely to be needed.

2. He wants to use it for some additional project upgrades (more likely to pay down some bridge loans)

3. As per the contract if the contingency is released as savings it is shared on 3:1 ratio i.e. 75% to owner and 25% to turner as additional project earning

4. Turner’s managers fear that once the contingency is released, future unseen problems (possible strike, floor cleaning cost) will have to paid by their own pockets resulting in less profits (turner’s are pretty determined in cost savings and they fear client will never give the money if required) so they want to hold the contingency amount till the last minute.

5. Turner’s have faced a loss of sale of a development building so they need to generate additional $200,000 for the quarter. Hence the higher authority is pressurizing to release the contingency so that they could use 25% of the amount.

PROBLEMS

1. Fear of burning their fingers if they release the contingency2. If contingency is not released they might lose the client for future projects3. Also, need of the hour is to cover up the quarterly balance4. Scope of the project is continuously changing though of not larger magnitude but there is a need

of a back up for the future

ANALYSIS

If they release $500,000 turner will be able to book $100,000 in the quarters earning and confidence of the client will be maintained (their policy of making client as partners). It is almost certain that some amount has to released, but how much is to be decided as they will have to consider the projections for the next quarter. So, following are some numbers,

1. Estimated bill of project: $29 Million and Time : 25 – 30 months (assume as 20% = 5 months)2. $215,000 has already been released from the contingency account and remaining amount is

$511,000 (1.8% approx)3. Funds in C – Hold: $328,000; Funds in E – Holds: $471,0004. 20% of work is still remaining i.e. 5 months still to work and with a possible strike, workers will

have to work extra time so overtime charges and clean – up charges assuming 10% of SITEWORK cost as overtime cost (we may assume any number) so we need $100,000 for overtime and clean-up (clean-up cost is also managed by E- Hold), keeping 25% buffer so amount required $125,000. This amount will be kept in Construction Contingency. So, amount left = $511,000 - $125,000 = $386,000

5. And remaining required amount can be taken from C – Hold = $500,000 - $386,000 = $114,000.6. Finally, after giving $500,000 we still have:

Construction Contingency = $125,000; C- Hold = $203,000 & E- Hold = $471,000