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Project Management 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 665 c17.qxd 12/21/12 7:00 PM Page 665 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 c17.qxd 12/21/12 7:00 PM Page 666 Exhibit I. Frank organization VP Eng. VP Control VP Procurement Purchasing Project A Project B Project C Mechanical Piping Electrical Civil Estimate Schedule 667 c17.qxd 12/21/12 7:00 PM Page 667 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 c17.qxd 12/21/12 7:00 PM Page 668 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. History of the Lewis Project 669 c17.qxd 12/21/12 7:00 PM Page 669 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