First, let me begin with a little autobiography. I have been in my current job for almost 4 years. In the spring of 2011, I was getting my certificate in medical billing and coding. I interned where I am currently employed, and once that internship was over, the woman who I had been working under resigned and suggested that I could replace her. The job was easy. Six months in and I had a clear desk and concern that there was something I was not doing. Having been recently unemployed, I worried about losing my job because I had figured out the processes.
In late January of 2012, my supervisor the CFO came to me and told me that we were stitching from our legacy payroll / billing / accounting system to a new one. There was worry about data integrity and we could never get the reports we wanted, so we ended up doing a lot of manual counting from printouts. The new system would eliminate that. Instead of one of the off the shelf systems that cost over a quarter of a million dollars, we were using a programmer who had written similar systems. The idea was that we could just pick at the edges and make his database work to our needs. The original goal was to have it working for the new fiscal year, FY13 and we had budgeted about $50,000.
I could write and write on this one, but the short part is that we are still working on perfecting it, and it is the middle of FY 15. Heck, it is almost over for us. I was still putting things I needed the program today in a list to email to the developer later this week. Therefore, when I read the Buzz’s woodworking project, the thing I could say about it was that it was familiar.
The expansion of Buzz’s was not well conceived at all. John Carpenter seems to want to remake his father’s company in his image. That is what led them to start growing out of the comfort zone to begin with. Buzz had a nice family company and now he wants to get in a cyclical business like subcontracting. We know from the end of the study that the boom in commercial construction that led to the desire to keep expanding ended up not booming anymore. The scale of the boom and the ultimate bust are unknowable. Perhaps instead of being above trend, there was a new normal in development so it of course made sense to expand. I am conservative and I know the future where they do not, so of course it was not well conceived.
However, it gets worse when you look at the planning. The case brings in no real numbers, just the boom and a possibility of airport expansion with more free trade. None of these is quantified. It is all reasoning from the gut. Even then the decision was made to grow, and the argument was not over that, but instead if they should move or expand. There was argument because it there were no numbers. So they then settled on a rough estimate that became the budget. There was acrimony from key players and no real sense of how long it would or should cost.
The objective of the project was to meet the prospective rising demand by increasing the existing floor area by 25%. To this would be added air conditioning and a dust-free paint shop. Finally, some of the bigwigs would get their offices renovated.
The decision-making was siloed early on. Spencer Moneysworth, the VP of Finance and Administration, took over the project. His first move was to remove the people in production from the process, as they were always busy and would get in the way. He also made several key decisions on his own, such as whom to retain for construction and the bidding process. There was no plan in place, so that each decision was made ad hoc. Moneysworth figured that he needed help so he enlisted an engineer who soon was off creating his own silo of work. The tasks were owned by the individuals, but there was no transparency about the process. Changes were made and that messed up things that had already been finished, making prices higher and time longer. Only when the new equipment came on line did anyone at Buzz’s think to review their process and their decision making, especially since the new equipment was under-utilized. The decisions should have been based off plans that were made at the beginning and then they could see where they were according to the process that was committed to. Instead everyone just dove in and started working without a plan, which is the most important part since it should guide everything else you do. Sure, it takes a little longer on the front end, but it pays off in terms of time and money saved.
To pay for the project, they at first stuck to the budget that was agreed on at the beginning as s rough estimate: $17 million dollars. From this, the controller took it and broke it up to a million dollar buffer with a 12-month year where they would spend a million in the first and last months and $1.4 million each month as they were really going at it. Then, presumably, the controller took the rest of the day off after all that work. It was not, of course, until the expense exceeded the budget when people noticed that the budget was out but the building is not done. Oops. Then you have to get more money because of all those sunk costs.
Ultimately, at Buzz’s, they paid too much for a thing that was not used enough, and it was not really within the original vision of what was wanted when Bruce Sharpe, the VP of Sales and Estimating, came to the directors with a vision of expanded marketing. The real lesson of this case is that you should never trust the sales people; nothing good comes from it. They are paid to be unfamiliar with the truth. More seriously, the key takeaway is to have a plan and follow it. From having a plan with measurable benchmarks, then you can continually judge “Quality” where you are and collaboratively reassess your plan as you go on. Otherwise, you fail, and you are written up as a case study in what not to do.
Compared to Buzz’s, Turner Construction Company has their planning nailed down. Now, it may be unfair to judge a one-off project like Buzz’s against Turner, but they are the same thing. How do you go about creating something in an uncertain atmosphere? You have a plan, and you have a quantification of that plan with numbers you capture as often as possible.
More specifically, Turner has a system that has worked and continues to work. It takes the guesswork out, as much as possible, and it is much more transparent, so that key things do not end up buried in a pile on some intermediary’s desk. A key component of the Turner Construction Company Project Management System is the IOR or “Indicated Outcome Report”. The projects use this IOR as a way to track risk in the system. This report is updated monthly, with more consolidated ones available quarterly. It is a best-guess prediction at the total cost and earnings projection for a project. This report allows tracking in as near real time as possible and helps Turner make rules-based decisions on preset plans, instead of putting out individual fires as they arose like we saw with Buzz’s Woodworking. There they just set a budget based on what they might think would be the cost and then tried to stick with it but did not have the processes down or the experience to know to outsource the planning while remaining a partner with whoever was implementing the plan. Bottom line is that Buzz’s thing was a mess from start to finish. At Turner they have three types of contingency moneys, one that probably will be spent (C-Holds), those that might be spent (E-Holds) that are set back just in case something changes. They also monitor things to be proactive to potential issues, instead of being reactive. These two cases are night and day, one shows what to do and another is just as instructive in showing what to do. If there were any weakness in the IOR system at Turner, it would be that there are many cooks and the question is where the final ownership for the numbers lies. Nevertheless, that just feels nit-picky. What is impressive is that they were able to create information in that sort of real time when the case was written. I would expect that they could have rough numbers on a day-to-day basis in terms of cost by now. I am not sure everyone would need that information, but it would be useful to management.
Concerning the case, my first inclination was to say that there should be no release. Gary Thompson, Philadelphia Territory General Manager, emphasizes that it is an option to say no, even if that is not what he wants to do. My thought was to trust the numbers in the IOR. If it says that we might need that money, especially with a new client, then say “Fie” to the client when they come asking for money they gave you for the project; explain to your manager that short-termism is horrible in the stock market, that if you realize gains in this period, you’re just foregoing them in the next. All that, and you might need that money, so you do not know if you can claw back what was once given from the client. You might realize a gain in this period and offset it not with nothing next period, but with a loss. Accounting tricks will be transparent to the market anyways (assuming market efficiency).
On a second read-through, I am ready to be more charitable. The numbers are to be trusted, but as Gary Thompson also says, the managers are trained to be conservative with the numbers, so that they do not underbid. That, plus you want to create a good relationship with this client. The market timing is not my concern unless I am planning to sell my personal shares soon, so we can move forward some earnings. The big question is if we can afford it. I think we can. Looking at it now, there are some expected contingencies. The project is already 80% finished, and there is still 1.8% of the original 2.5% contingency left, along with significant C and E holds. My inclination is to free up the money. Looking at it, there is a 4.5% cushion of the total project cost in the various contingencies, which is over 22% of the projected remaining cost. Therefore, unless the remaining twenty percent of the building runs over by almost a quarter, you should be good. Seeing as how only 0.7% of the total project cost of 29 million has been utilized in contingency so far, I would trust the people working on the project enough to free up the cash. A full release still leaves your full E and C hold and $11,000 in contingency or 2.8% of the total cost or a cushion of 14% on the remaining cost of the building. If you trust your IOR, you should be fine, you develop that customer relationship, and you realize some more revenue in this period. Win. Win. Win.
Releasing the money gets us back to the importance of having a plan, and goals, and measurable. It allows you flexibility based on the information that you have and the faith you have in the data gathering and analysis process. My first response was more akin to someone working at Buzz’s -- reactionary. Better to look at the information and what your goals are, and then you can make decisions smarter and better. This is not done in a vacuum, the processes are important to have lain out, and there needs to be buy-in from everyone as partners in the projects undertaken. This has been one of the most important things I have learned during my time at Concordia. Before I started, I though the real issue with the project I spoke about at the beginning of this essay was about resources. We did not throw enough money at the project. The real issue was that we did not have a plan. We dove in and started, moving from perceived goal to perceived goal with no measurable and creating the illusion of progress. I think the end is near, but planning it out properly would have shaved off so many hours spent on false direction.