Turner Construction Company: Project Management Control Systems
Harvard Business School XXXXXXXXXX
Rev. October 18, 1999
Hilary Weston prepared this case under the supervision of Professor Robert Simons as the basis for class discussion rathe
than to illustrate either effective or ineffective handling of an administrative situation.
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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 te
itory general manager, went on to explain the
esulting 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 wo
y 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 te
itory could contribute.
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XXXXXXXXXXTurner Construction Company: Project Management Control Systems
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I’ve asked Jim Verzella, the project executive on the Kent Square building, to
eview 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
epresentative.
Les Shute is coming down at the end of the week for his monthly Te
itory
Review meeting. I need to have an answer for him on what additional amount ou
te
itory 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
ains of my five project executives to see
how much contingency each of them can release from their cu
ent 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 ou
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 te
itories, each headed by a te
itory
general manager (TGM). Top management gave each TGM considerable autonomy to run his
te
itory 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 te
itory structure. A te
itory’s operations
manager (TOM), who reported to the TGM, assembled project teams from his te
itory’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
te
itory CEO.) Reporting to the TOM were three to six project executives who each headed four o
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 a
eviations used in the case is provided on page 14.
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Turner Construction Company: Project Management Control Systems XXXXXXXXXX
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 abso
ed 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 casewrite
mentioned the “$500,000 question” cu
ently 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 othe
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 Turne
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
eporting systems. (See Exhibit 3 for a list of the most important management
eports 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
co
esponding dollars that will flow out to subcontractors and suppliers on the right
side. Any difference in the two sides represents savings or cost ove
uns 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
oken 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