Case Teaneck



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TEANECK CONSTRUCTION COMPANY Teaneck is a small organization with 90% of its peso volume obtained from contracts for municipal work. Management decided to submit a bid for the construction in April of a mile-long extension to the main sewer system in a nearby town which until now has used septic tanks. The bidding is expected to be competitive because whoever gets this contract will have some advantage in obtaining a contract to be awarded by the town later in the year worth about P50 million.

In order to submit the most competitive bid possible, the project managers of Teaneck decided to evaluate the alternatives of using one, two or three work shifts. Table 1 shows time and cost estimates of Teaneck’s engineers. The trunk sewer extension is to be laid in a tunnel for 1/3 its length; the remaining 2/3 is to be constructed in trenches. To build the tunnel, a primary shaft must be excavated first, then the secondary shafts can be driven and the tunnel can be dug simultaneously. The trench is to be started at the same time as the primary shaft.

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Another crew of workers follows the trench workers, laying pipes, pouring concrete and refilling trenches as far as they have been excavated. The excavators lose no time as a result of this follow up. A third group would be performing a similar function in the tunnel. Teaneck’s direct labor is hired from union pools. There is a strong chance that the local Excavators Union will strike on the project’s inception date which may seriously affect its profitability. At a meeting of the project managers, there was a consensus to use 80% probability of such a strike for planning purposes.

With a strike, direct costs would remain unchanged, since the issue involved was not one of wages; but indirect costs would accrue for the duration of the strike at the same daily rate as indicated in Table 1. General and administrative costs are put at 40% of the sum of direct and indirect costs. Normally, Teaneck aims at making a profit equal to 10% of total costs. There was also a recognized need to develop some kind of estimate to describe the probability of the strike’s duration. With a great deal of misgiving, the project managers came up with the following guesses:

Length of the strike in days 20 30 40 Probability of a strike of n days, on condition that a strike occurs 0. 25 0. 25 0. 50 You are the project manager assigned. The president and his two executive vice-presidents have asked you for a detailed recommendation, including the exact bid to be submitted. ? One Shift Two Shifts Three Shifts TABLE 1 ACTIVITYPredecessorDaysPesosDaysPesosDaysPesos

AMove in machinery/equipment-12 150,000 6 165,000 4 180,000 BExcavate primary shaftA12 347,500 12 347,500 12 347,500 CExcavate secondary shaftsB60 312,500 24 330,000 12 347,500 DExcavate trenchesA300 1,685,000150 2,125,000 100 2,235,000 EExcavate tunnelB305 1,807,500155 1,955,000 105 2,000,000 FBackfill (trenches only)J50 50,000 25 75,000 17 100,000 GPipelaying in trenchesD50 375,000 25 410,00017 445,000 HPipelaying in tunnelC,E50 275,000 25 285,000 15 300,000 JPour concrete in trenchesG70 570,000 35 582,500 25 592,500 KPour concrete in tunnelH60 550,000 30 562,50020 575,000 LLandscapeK, F10 100,000 8 145,000 6 150,000

MMove outL6 25,000 3 37,500 2 50,000 Total Indirect Costs P7,000/day P8,000/day P9,000/day Critical Path Method: ABEHKLM – 455 days ABCHKLM – 210 days ADGJFLM – 498 days ACTIVITYPredecessorDaysPesosDaysPesosDaysPesos AMove in machinery/equipment-12150,0006165,0004180,000 BExcavate primary shaftA12347,50012347,50012347,500 CExcavate secondary shaftsB60312,50024330,00012347,500 DExcavate trenchesA3001,685,0001502,125,0001002,235,000 EExcavate tunnelB3051,807,5001551,955,0001052,000,000 FBackfill (trenches only)J5050,0002575,00017100,000

GPipelaying in trenchesD50375,00025410,00017445,000 HPipelaying in tunnelC,E50275,00025285,00015300,000 JPour concrete in trenchesG70570,00035582,50025592,500 KPour concrete in tunnelH60550,00030562,50020575,000 LLandscapeK, F10100,0008145,0006150,000 MMove outL625,000337,500250,000 One ShiftTwo ShiftThree Shift Direct Cost2,955,0003,540,0003,752,500 Cost of project Indirect Cost3486000 3984000 4482000 6,441,0007,524,0008,234,500 Additional Cost due to strike (40 days * indirect cost)280,000320,000360,000

Gen and Admin2,576,4003,009,6003,293,800 Total Cost9,297,400 10,853,600 11,888,300 Profit at 10% 929,740. 00 1,085,360. 00 1,188,830. 00 We will assume that the strike will be for the total of 40 days. To get the bidding price, we must consider the lowest cost of completing the task with the presumption that the strike will push through. The completion of the task with one shift will be chosen since it has the lowest cost among the rest of the proposals.

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