It was Friday afternoon, a late November day in 2003, and Ron Katz, a purchas- ing agent for Robert L. Frank Construction, poured over the latest earned value measurement reports. The results kept pointing out the same fact; the Lewis project was seriously over budget. Man-hours expended to date were running 30 percent over the projection and, despite this fact, the project was not progressing sufficiently to satisfy the customer. Material deliveries had experienced several slippages, and the unofficial indication from the project scheduler was that, due to delivery delays on several of the project’s key items, the completion date of the coal liquefaction pilot plant was no longer possible.
Katz was completely baffled. Each day for the past few months as he reviewed the daily printout of project time charges, he would note that the pur- chasing and expediting departments were working on the Lewis project, even though it was not an unusually large project, dollarwise, for Frank. Two years ear- lier, Frank was working on a $300 million contract, a $100 million contract and a $50 million contract concurrently with the Frank Chicago purchasing depart- ment responsible for all the purchasing, inspection, and expediting on all three contracts. The Lewis project was the largest project in house and was valued at only $90 million. What made this project so different from previous contracts and caused such problems? There was little Katz felt that he could do to correct the situation. All that could be done was to understand what had occurred in an effort
Robert L. Frank Construction Company
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to prevent a recurrence. He began to write his man-hour report for requested by the project manager the next day.
COMPANY BACKGROUND
Robert L. Frank Construction Company was an engineering and construction firm serving the petroleum, petrochemical, chemical, iron and steel, mining, pharma- ceutical, and food-processing industries from its corporate headquarters in Chicago, Illinois, and its worldwide offices. Its services include engineering, pur- chasing, inspection, expediting, construction, and consultation.
Frank’s history began in 1947 when Robert L. Frank opened his office. In 1955, a corporation was formed, and by 1960 the company had completed con- tracts for the majority of the American producers of iron and steel. In 1962, an event occurred that was to have a large impact on Frank’s future. This was the merger of Wilson Engineering Company, a successful refinery concern, with Robert L. Frank, now a highly successful iron and steel concern. This merger greatly expanded Frank’s scope of operations and brought with it a strong period of growth. Several offices were opened in the United States in an effort to better handle the increase in business. Future expansions and mergers enlarged the Frank organization to the point where it had fifteen offices or subsidiaries located throughout the United States and twenty offices worldwide. Through its first twenty years of operations, Frank had more than 2,500 contracts for projects hav- ing an erected value of over $1 billion.
Frank’s organizational structure has been well suited to the type of work undertaken. The projects Frank contracted for typically had a time constraint, a budget constraint, and a performance constraint. They all involved an outside cus- tomer such as a major petroleum company or a steel manufacturer. Upon accep- tance of a project, a project manager was chosen (and usually identified in the proposal). The project manager would head up the project office, typically con- sisting of the project manager, one to three project engineers, a project control manager, and the project secretaries. The project team also included the necessary functional personnel from the engineering, purchasing, estimating, cost control, and scheduling areas. Exhibit I is a simplified depiction. Of the functional areas, the purchasing department is somewhat unique in its organizational structure. The purchasing department is organized on a project management basis much as the project as a whole would be organized. Within the purchasing department, each project had a project office that included a project purchasing agent, one or more project expeditors and a project purchasing secretary. Within the purchasing department the project purchasing agent had line authority over only the project expeditor(s) and project secretary. However, for the project pur- chasing agent to accomplish his goals, the various functions within the purchasing
666 ROBERT L. FRANK CONSTRUCTION COMPANY
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Exhibit I. Frank organization
VP Eng. VP Control VP Procurement
Purchasing
Project A
Project B
Project C
Mechanical Piping Electrical Civil Estimate Schedule
667
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department had to commit sufficient resources. Exhibit II illustrates the organi- zation within the purchasing department.
HISTORY OF THE LEWIS PROJECT
Since 1998, the work backlog at Frank has been steadily declining. The Rovery Project, valued at $600 million, had increased company employment sharply since its inception in 1997. In fact, the engineering on the Rovery project was such a large undertaking that in addition to the Chicago office’s participation, two other U.S. offices, the Canadian office, and the Italian subsidiary were heavily involved. However, since the Rovery project completion in 2001, not enough new
668 ROBERT L. FRANK CONSTRUCTION COMPANY
Exhibit II. Frank purchasing organization
Mgr. Procurement
Mgr. Buying, Esp., Insp.
Project A
Project B
Project C
Admin. Assistant
Chief Inspector
InspectionMgr. Buying Mgr. Traffic Chief Expediter
Buying Traffic Expediting
Project D
Project E
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work was received to support the work force thus necessitating recent lay-offs of engineers, including a few project engineers.
Company officials were very disturbed with the situation. Frank’s company policy was to “maintain an efficient organization of sufficient size and resources, and staffed by people with the necessary qualifications, to execute projects in any location for the industries served by Frank.” However, the recent down- turn in business meant that there was not enough work even with the reduction in employees. Further cutbacks would jeopardize Frank’s prospects of obtaining future large projects as prospective clients look to contractors with a sufficient staff of qualified people to accomplish their work. By contrast, supporting employees out of overhead was not the way to do business, either. It became increasingly important to “cut the fat out” of the proposals being submitted for possible projects. Despite this, new projects were few and far between, and the projects that were received were small in scope and dollar value and therefore did not provide work for very many employees.
When rumors of a possible construction project for a new coal liquefaction pilot plant started circulating, Frank officials were extremely interested in bidding for the work. It was an excellent prospect for two reasons. Besides Frank’s des- perate need for work, the Lewis chemical process used in the pilot plant would benefit Frank in the long run by the development of state-of-the-art technology. If the pilot plant project could be successfully executed, when it came time to construct the full-scale facility, Frank would have the inside track as they had already worked with the technology. The full-scale facility offered prospects exceeding the Rovery project, Frank’s largest project to date. Top priority was therefore put on obtaining the Lewis project. It was felt that Frank had a slight edge due to successful completion of a Lewis project six years ago. The proposal submitted to Lewis contained estimates for material costs, man-hours, and the fee. Any changes in scope after contract award would be handled by change order to the contract. Both Lewis and Frank had excellent scope change control processes as part of their configuration management plans. The functional department affected would submit an estimate of extra man-hours involved to the project man- ager, who would review the request and submit it to the client for approval. Frank’s preference was for cost-plus-fixed-fee contracts.
One of the unique aspects stated in the Lewis proposal was the requirement for participation by both of Frank Chicago’s operating divisions. Previous Frank contracts were well suited to either Frank’s Petroleum and Chemical Division (P & C) or the Iron and Steel Division (I & S). However, due to the unusual chem- ical process, one that starts with coal and ends up with a liquid energy form, one of the plant’s three units was well suited to the P & C Division and one was well suited to the I & S Division. The third unit was an off-site unit and was not of par- ticular engineering significance.
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The award of the contract six weeks later led to expectations by most Frank personnel that the company’s future was back on track again. The project began inauspiciously. The project manager was a well-liked, easy-going sort who had been manager of several Frank projects. The project office included three of Frank’s most qualified project engineers.
In the purchasing department, the project purchasing agent (PPA) assigned to the project was Frank’s most experienced PPA. Bill Hall had just completed his assignment on the Rovery Project and had done well, considering the magnitude of the job. The project had its problems, but they were small in comparison to the achievements. He had alienated some of the departments slightly but that was to be expected. Purchasing upper management was somewhat dissatisfied with him in that, due to the size of the project, he didn’t always use the normal Frank pur- chasing methods; rather, he used whatever method he felt was in the best interest of the project. Also, after the Rovery project, a purchasing upper management reshuffling left him in the same position but with less power and authority rather than receiving a promotion he had felt he had earned. As a result, he began to sub- tly criticize the purchasing management. This action caused upper management to hold him in less than high regard but, at the time of the Lewis Project, Hall was the best person available.
Due to the lack of float in the schedule and the early field start date, it was necessary to fast start the Lewis Project. All major equipment was to be pur- chased within the first three months. This, with few exceptions, was accom- plished. The usual problems occurred such as late receipt of requisition from engineering and late receipt of bids from suppliers.
One of the unique aspects of the Lewis project was the requirement for pur- chase order award meetings with vendors. Typically, Frank would hold award meetings with vendors of major equipment such as reactors, compressors, large process towers, or large pumps. However, almost each time Lewis approved pur- chase of a mechanical item or vessel, it requested that the vendor come in for a meeting. Even if the order was for an on-the-shelf stock pump or small drum or tank, a meeting was held. Initially, the purchasing department meeting attendees included the project purchasing agent, the buyer, the manager of the traffic depart- ment, the chief expeditor, and the chief Inspector. Engineering representatives included the responsible engineer and one or two of the project engineers. Other Frank attendees were the project control manager and the scheduler. Quite often, these meetings would accomplish nothing except the reiteration of what had been included in the proposal or what could have been resolved with a phone call or even e-mail. The project purchasing agent was responsible for issuing meeting notes after each meeting.
One day at the end of the first three-month period, the top-ranking Lewis rep- resentative met with Larry Broyles, the Frank project manager.
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Lewis rep: Larry, the project is progressing but I’m a little concerned. We don’t feel like we have our finger on the pulse of the project. The information we are getting is sketchy and untimely. What we would like to do is meet with Frank every Wednesday to review progress and resolve problems.
Larry: I’d be more than happy to meet with any of the Lewis people because I think your request has a lot of merit.
Lewis rep: Well, Larry, what I had in mind was a meeting between all the Lewis people, yourself, your project office, the project purchasing agent, his assistant, and your scheduling and cost control people.
Larry: This sounds like a pretty involved meeting. We’re going to tie up a lot of our people for one full day a week. I’d like to scale this thing down. Our pro- posal took into consideration meetings, but not to the magnitude we’re talking about.
Lewis rep: Larry, I’m sorry but we’re footing the bill on this project and we’ve got to know what’s going on.
Larry: I’ll set it up for this coming Wednesday. Lewis rep: Good.
The required personnel were informed by the project manager that effective immediately, meetings with the client would be held weekly. However, Lewis was dissatisfied with the results of the meetings, so the Frank project manager informed his people that a premeeting would be held each Tuesday to prepare the Frank portion of the Wednesday meeting. All of the Wednesday participants attended the Tuesday premeetings.
Lewis requests for additional special reports from the purchasing department were given into without comment. The project purchasing agent and his assistants (project started with one and expanded to four) were devoting a great majority of their time to special reports and putting out fires instead of being able to track progress and prevent problems. For example, recommended spare parts lists were normally required from vendors on all Frank projects. Lewis was no exception. However, after the project began, Lewis decided it wanted the spare parts recom- mendations early into the job. Usually, spare parts lists are left for the end of an order. For example, on a pump with fifteen-week delivery, normally Frank would pursue the recommended spare parts list three to four weeks prior to shipment, as it would tend to be more accurate. This improved accuracy was due to the fact that at this point in the order, all changes probably had been made. In the case of the Lewis project, spare parts recommendations had to be expedited from the day the material was released for fabrication. Changes could still be made that could dramatically affect the design of the pump. Thus, a change in the pump after receipt of the spare parts list would necessitate a new spare parts list. The time involved in this method of expediting the spare parts list was much greater than the
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time involved in the normal Frank method. Added to this situation was Lewis’s request for a fairly involved biweekly report on the status of spare parts lists on all the orders. In addition, a full time spare parts coordinator was assigned to the project.
The initial lines of communication between Frank and Lewis were initially well defined. The seven in-house Lewis representatives occupied the area adja- cent to the Frank project office (see Exhibit III). Initially, all communications from Lewis were channeled through the Frank project office to the applicable functional employee. In the case of the purchasing department, the Frank project office would channel Lewis requests through the purchasing project office. Responses or return communications followed the reverse route. Soon the volume of communications increased to the point where response time was becoming unacceptable. In several special cases, an effort was made to cut this response time. Larry Broyles told the Lewis team members to call or go see the functional per- son (i.e., buyer or engineer) for the answer. However, this practice soon became the rule rather than the exception. Initially, the project office was kept informed
672 ROBERT L. FRANK CONSTRUCTION COMPANY
Exhibit III. Floor plan—Lewis project teams
Project Manager
Assistant to Project
Manager
Procurement Advisor
Inspection Coordinator
Vacant Project Control
Manager
Chief Project Engineer
Project Manager
Project Engineer
Project Engineer
Project Engineer
Assistant Project Engineer
Engineer
Engineer
Cost Control
Grey boxed text Indicates Lewis Personnel
Normal text Indicates Frank Personnel
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of these conversations, but this soon stopped. The Lewis personnel had integrated themselves into the Frank organization to the point where they became part of the organization.
The project continued on, and numerous problems cropped up. Vendors’ material delays occurred, companies with Frank purchase orders went bankrupt, and progress was not to Lewis’s satisfaction. Upper management soon became aware the problems on this project due to its sensitive nature, and the Lewis project was now receiving much more intense involvement by senior management than it had previously. Upper management sat in on the weekly meetings in an attempt to pacify Lewis. Further problems plagued the project. Purchasing management, in an attempt to placate Lewis, replaced the project purchasing agent. Ron Katz, a promising young MBA graduate, had five years of experience as an assistant to several of the project purchasing agents. He was most recently a project purchas- ing agent on a fairly small project that had been very successful. It was thought by purchasing upper management that this move was a good one, for two reasons. First, it would remove Bill Hall from the project as PPA. Second, by appointing Ron Katz, Lewis would be pacified, as Katz was a promising talent with a suc- cessful project under his belt.
However, the project under direction of Katz still experienced problems in the purchasing area. Revisions by engineering to material already on order caused serious delivery delays. Recently requisitioned material could not be located with an acceptable delivery promise. Katz and purchasing upper management, in an attempt to improve the situation, assigned more personnel to the project, personnel that were more qualified than the positions dictated. Buyers and upper-level pur- chasing officials were sent on trips to vendors’ facilities that were normally han- dled by traveling expediters. In the last week the Lewis representative met with the project manager, Broyles:
Lewis rep: Larry, I’ve been reviewing these man-hour expenditures, and I’m disturbed by them.
Larry: Why’s that? Lewis rep: The man-hour expenditures are far outrunning project progress.
Three months ago, you reported that the project completion percentage was 30 percent, but according to my calculations, we’ve used 47 percent of the man hours. Last month you reported 40 percent project completion and I show a 60 percent expenditure of man-hours.
Larry: Well, as you know, due to problems with vendors’ deliveries, we’ve really had to expedite intensively to try to bring them back in line.
Lewis rep: Larry, I’m being closely watched by my people on this project, and a cost or schedule overrun not only makes Frank look bad, it makes me look bad.
Larry: Where do we go from here?
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Lewis rep: What I want is an estimate from your people on what is left, man- hour wise. Then I can sit down with my people and see where we are.
Larry: I’ll have something for you the day after tomorrow. Lewis rep: Good.
The functional areas were requested to provide this information, which was reviewed and combined by the project manager and submitted to Lewis for approval. Lewis’s reaction was unpleasant, to say the least. The estimated man- hours in the proposal were now insufficient. The revised estimate was for almost 40 percent over the proposal. The Lewis representative immediately demanded an extensive report on the requested increase. In response to this, the project man- ager requested man-hour breakdowns from the functional areas. Purchasing was told to do a purchase order by purchase order breakdown of expediting and inspection man-hours. The buying section had to break down the estimate of the man-hours needed to purchase each requisition, many of which were not even issued. Things appeared to have gone from bad to worse.
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