Case Study 1

The award of the Scott contract on January 3, 1987, left Park Industries elated. The Scott
Project, if managed correctly, offered tremendous opportunities for follow-on work over the next
several years. Park’s management considered the Scott Project as strategic in nature.

The Scott Project was a ten-month endeavor to develop a new product for Scott Corporation.
Scott informed Park Industries that sole-source production contracts would follow, for at least
five years, assuming that the initial R&D effort proved satisfactory. All follow-on contracts were
to be negotiated on a year- to-year basis.

Jerry Dunlap was selected as project manager. Although he was young and eager, he
understood the importance of the effort for future growth of the company. Dunlap was given
some of the best employees to fill out his project office as part of Park’s matrix organization. The
Scott Project maintained a project office of seven full-time people, including Dunlap, throughout
the duration of the project. In addition, eight people from the functional department were
selected for representation as functional project team members, four full-time and four half-time.

Although the workload fluctuated, the manpower level for the project office and team members
was constant for the duration of the project at 2,080 hours per month. The company assumed
that each hour worked incurred a cost of $60.00 per person, fully burdened. At the end of June,
with four months remaining on the project, Scott Corporation informed Park Industries that,
owing to a projected cash flow problem, follow-on work would not be awarded until the first
week in March (1988). This posed a tremendous problem for Jerry Dunlap because he did not
wish to break up the project office. If he permitted his key people to be assigned to other
projects, there would be no guarantee that he could get them back at the beginning of the
follow-on work. Good project office personnel are always in demand.

Jerry estimated that he needed $40,000 per month during the “bathtub” period to support and
maintain his key people. Fortunately, the bathtub period fell over Christmas and New Year’s, a
time when the plant would be shut down for seven- teen days. Between the vacation days that
his key employees would be taking, and the small special projects that this people could be
temporarily assigned to on other programs, Jerry revised his estimate to $125,000 for the entire
bathtub period.

At the weekly team meeting, Jerry told the program team members that they would have to
“tighten their belts” in order to establish a management reserve of

$125,000. The project team understood the necessity for this action and began rescheduling
and replanning until a management reserve of this size could be realized. Because the contract
was firm-fixed-price, all schedules for administrative support (i.e., project office and project team
members) were extended through February 28 on the supposition that this additional time was
needed for final cost data accountability and program report documentation.

Jerry informed his boss, Frank Howard, the division head for project management, as to the
problems with the bathtub period. Frank was the intermediary between Jerry and the general
manager. Frank agreed with Jerry’s approach to the problem and requested to be kept
informed.

On September 15, Frank told Jerry that he wanted to “book” the management reserve of
$125,000 as excess profit since it would influence his (Frank’s) Christmas bonus. Frank and
Jerry argued for a while, with Frank constantly saying, “Don’t worry! You’ll get your key people
back. I’ll see to that. But I want those uncommitted funds recorded as profit and the program
closed out by November 1.”

Jerry was furious with Frank’s lack of interest in maintaining the current organizational
membership.

QUESTIONS:

1. Should Jerry go to the general manager?

2. Should the key people be supported on overhead?

3. If this were a cost-plus program, would you consider approaching the customer with your
problem in hopes of relief?

4. If you were the customer of this cost-plus program, what would your response be for
additional funds for the bathtub period, assuming cost overrun?

5. Would your previous answer change if the program had the money available as a result
of an underrun?

6. How do you prevent this situation from recurring on all yearly follow-on contracts?

Case Study 2

On November 15, 1978, the Department of Energy Resources awarded Telestar a $475,000
contract for the developing and testing of two waste treatment plants. Telestar had spent the
better part of the last two years developing waste treatment technology under its own R&D
activities. This new contract would give Telestar the opportunity to “break into a new field”—that
of waste treatment.

The contract was negotiated at a firm-fixed price. Any cost overruns would have to be incurred
by Telestar. The original bid was priced out at $847,000. Telestar’s management, however,
wanted to win this one. The decision was made that Telestar would “buy in” at $475,000 so that
they could at least get their foot into the new marketplace.

The original estimate of $847,000 was very “rough” because Telestar did not have any good
man-hour standards, in the area of waste treatment, on which to base their man-hour
projections. Corporate management was willing to spend up to $400,000 of their own funds in
order to compensate the bid of $475,000.

By February 15, 1979, costs were increasing to such a point where overrun would be occurring
well ahead of schedule. Anticipated costs to completion were now $943,000. The project
manager decided to stop all activities in certain functional departments, one of which was
structural analysis. The manager of the structural analysis department strongly opposed the
closing out of the work order prior to the testing of the first plant’s high-pressure pneumatic and
electrical systems.

Structures manager: “You’re running a risk if you close out this work order. How will you know if
the hardware can withstand the stresses that will be im- posed during the test? After all, the test
is scheduled for next month and I can probably finish the analysis by then.”

Project manager: “I understand your concern, but I cannot risk a cost overrun. My boss expects
me to do the work within cost. The plant design is similar to one that we have tested before,
without any structural problems being detected. On this basis I consider your analysis
unnecessary.”

Structures manager: “Just because two plants are similar does not mean that they will be
identical in performance. There can be major structural deficiencies.”

Project manager: “I guess the risk is mine.”

Structures manager: “Yes, but I get concerned when a failure can reflect on the integrity of my
department. You know, we’re performing on schedule and within the time and money budgeted.
You’re setting a bad example by cutting off our budget without any real justification.”

Project manager: “I understand your concern, but we must pull out all the stops when overrun
costs are inevitable.”

Structures manager: “There’s no question in my mind that this analysis should be completed.
However, I’m not going to complete it on my overhead budget. I’ll reassign my people tomorrow.
Incidentally, you had better be careful; my people are not very happy to work for a project that
can be canceled immediately. I may have trouble getting volunteers next time.”

Project manager: “Well, I’m sure you’ll be able to adequately handle any future work.

I’ll report to my boss that I have issued a work stoppage order to your department.”

During the next month’s test, the plant exploded. Post analysis indicated that the failure was due
to a structural deficiency.

QUESTIONS:

1. Who is at fault?

2. Should the structures manager have been dedicated enough to continue the work on his
own?
3. Can a functional manager, who considers his organization as strictly support, still be
dedicated to total project success?