The Handys Woodworking Company is a small-to-medium sized custom furniture and cabinet making company, with head-office and a spacious plant site at Industrial Estates, Melbourne. Its Chairman and Chief Executive Officer is Ron Haywood now in his late-sixties. His wife Mrs. Emy Haywood, being an aggressive business woman and somewhat younger than her husband, now effectively runs the company. Ron Heywood is affectionately known to all as "Handy" and so the company is generally known as "Handy's". Handy, after an apprenticeship as a cabinet maker, started his small furniture manufacturing business back in 1964 and he and his wife moved to their present location in 1969. The company quickly gained a reputation for attractively designed and well constructed furniture, using imported hardwoods and indigenous softwoods for its products. Handy's now produces custom furniture to order, several lines of furniture for wholesaler/retailers, and a number of variations of standard kitchen and bathroom cabinets, including units made to order. Over the years the Haywoods continued to prosper and built up a loyal staff and work force. More recently their son, John Haywood, has joined the company's management after having obtained a commerce degree at the local university. At John Haywood's insistence, lured by longer production runs and higher and more consistent mark-ups, the company has moved into subcontract work supplying and installing counter-tops, cabinets and similar fixtures for new commercial construction. To date, Handy's has established a well-founded reputation for supplying millwork to the construction industry. The Opportunity There has been a mini-boom in commercial construction in Western suburbs of Melbourne. Bruce Sharpe (VP of Sales and Estimating) persuaded Handy's directors that they were well placed to expand their manufacturing business. Miles Faster (VP of Production), regularly complained that the company's production efficiency was being thwarted by lack of manufacturing space, made a pitch to John Haywood for moving to completely new and more modern facilities. John Haywood, with a vision of growth based on computer controlled automation, talked over the idea with his father. Handy discussed it with his wife who in turn brought Kim Cashman (Controller) and Spencer Moneysworth (VP of Finance and Administration) into the debate. Cashman and Moneysworth felt strongly that they should remain in their current location since there was spare land on their property, even though it was not the most convenient for plant expansion. They argued that not only would this avoid the costs of buying and selling property, but more importantly avoid the interruption to production while relocating their existing equipment. Besides, the nearest potential location at an attractive price was at least 20 kms further out from the residential area where most of them lived. Polarization of opinions rapidly became evident and so, in the spring of 2010, Handy called a meeting of the directors and key personnel to resolve the issue. After a visit to the factory floor and a prolonged and sometimes bitter argument lasting into the early hours, it was agreed that the company would stay put on its existing property Handy's Corporate Profile Head Office Melbourne, Victoria Business Furniture manufacturing, custom millwork, and hardwood importer; federal charter 1960; privately held; number of employees approx. 850. Major Shareholder: Rainwood Holdings Ltd. On December 31, 2010, total assets were $181,000,000. In fiscal 2010, sales were $93,250,000 with net earnings of $6,540,000. Directors Chairman & CEO Ron Haywood President Mrs. Emy Haywood Executive Vice President Kim Qualey Director John Haywood Key personnel VP Production Miles Faster VP Finance and Administration Spencer Moneysworth VP Personnel Molly Bussell VP Sales and Estimating Bruce Sharpe Controller Kim Cashman Other key players Ian Leadbetter Handys project manager Randy Schemers Industrial design consultant, Schemers and Plotters (S&P) Alfred Fowler Industrial property developers, Director, Expert Developers (ED) Ivar Kontark ED's Project Manager Dave Rivett I. Beam Construction Ltd., steel fabricators and installers Bert Leaky Classic Cladding Co., cladding and roofing contractors Charlie Droppe Water proofing contractor, Rain Water Ltd. Amos Dent Mechanical equipment contract, Reece Associate Olaf Volta Electrical contractor, Zapp Electrical Eddie Forgot Equipment supplier, Piecemeal Corporation Win Easley Project management consultant The Project Concept It was agreed at the meeting that additional production capacity would be added equivalent to 25% of the existing floor area. The opportunity would also be taken to install air-conditioning and a dust-free paint and finishing shop complete with additional compressor capacity. Equipment would include a semi-automatic woodworking production train, requiring the development and installation of software and hardware to run it. The President and Executive Vice Presidents' offices would also be renovated. At the meeting, the total cost of the work, not including office renovation, was roughly estimated at $17 million. Handy agreed to commit the company to a budget of $17 million as an absolute maximum for all proposed work and the target date for production would be eighteen months from now. To give Handy's personnel a feeling of ownership, Molly Bussell (VP of Personnel) proposed that the project should be called Handy 2010. Spencer Moneysworth would take responsibility for Project Handy 2010. Planning Moneysworth was keen to show his administrative abilities. He decided not to involve the production people as they were always too busy and, anyway, that would only delay progress. So, not one for wasting time (on planning), Moneysworth immediately invited Expert Developers (ED) to quote on the planned expansion. He reasoned that this contractor's prominence on the industrial estate and their knowledge of industrial work would result in a lower total project cost. Meanwhile, Kim Cashman developed a monthly cash flow chart as follows: First he set aside one million for contingencies. Then he assumed expenditures would be one million in each of the first and last months, with an intervening ten months at $1.4 million each. He carefully locked the cash flow chart away in his drawer for future reference. All actual costs associated with the project would be recorded as part of the company's normal book-keeping. Upon Moneysworth's insistence, ED submitted a fixed-price quotation. It amounted to $20 million and an eighteen-month schedule. After Moneysworth recovered from the shock, he persuaded Handy's management that the price and schedule were excessive. (For their part, ED believed that Handy's would need considerable help with their project planning and allowed for a number of uncertainties). Further negotiations followed in which ED offered to undertake the work based on a fully reimbursable contract. Moneysworth started inquiries elsewhere but ED countered with an offer to do their own work on cost plus but solicit fixed price quotations for all sub-trade work. Under this arrangement ED would be paid an hourly rate covering direct wages or salaries, payroll burden, head-office overhead and profit. This rate would extend to all engineering, procurement, construction and commissioning for which ED would employ Schemers and Plotters (S&P) for the building and industrial design work. Moneysworth felt that the proposed hourly rate was reasonable and that the hours could be monitored effectively. He persuaded Handy's directors to proceed accordingly. The Design A couple of months later as S&P commenced their preliminary designs and raised questions and issues for decision, Moneysworth found he needed assistance to cope with the paper work. John Haywood suggested he use Ian Leadbetter, a bright young mechanical engineer who had specialized in programming semi-automatic manufacturing machinery. Moneysworth realized that this knowledge would be an asset to the project and gave Leadbetter responsibility for running the project. Ian was keen to demonstrate his software skills to his friend John Haywood. So, while he lacked project management training and experience (especially any understanding of "project life-cycle" and "control concepts") he readily accepted the responsibility. During the initial phases of the mechanical design, Ian Leadbetter made good progress on developing the necessary production line control software program. However, early in design ED suggested that Handy's should take over the procurement of the production train directly, since they were more knowledgeable of their requirements. Miles Faster jumped at the opportunity to get involved and decided to change the production train specification to increase capacity. Because of this, the software program had to be mostly rewritten, severely limiting Leadbetter's time for managing the project. It also resulted in errors requiring increased debugging at startup. Neither Moneysworth nor Leadbetter was conscious of the need for any review and approval procedures for specifications and shop drawings submitted directly by either S&P or by Eddie Forgot of Piecemeal Corporation, the suppliers of the production train. In one two-week period, during which both Faster and Leadbetter were on vacation, the manufacturing drawings for this critical long-lead equipment sat in a junior clerk's in-tray awaiting approval. For this reason alone, the delivery schedule slipped two weeks, contributing to a later construction schedule conflict in tying-in the new services. Construction Site clearing was tackled early on with little difficulty. However, as the main construction got into full swing some eight months later, more significant problems began to appear. The change in production train specification made it necessary to add another five feet to the length of the new building. This was only discovered when holding-down bolts for the new train were laid out on site, long after the perimeter foundations had been poured. The catalogue descriptions and specifications for other equipment selected were similarly not received and reviewed until after the foundations had been poured. Leadbetter was not entirely satisfied with the installation of the mechanical equipment for the dust-free paint shop. As a registered mechanical engineer, he knew that the specifications governed the quality of equipment, workmanship and performance. However, since these documents had still not been formally approved, he was loath to discuss the matter with Ivar Kontrak. Instead, he dealt directly with Amos Dent of Reece Associates, the mechanical sub-contractor. This led to strained relations on the site. Another difficulty arose with the paint shop because the local inspection authority insisted that the surplus paint disposal arrangements be upgraded to meet the latest environmental standards. Startup Two years after the project was first launched, the time to get the plant into production rapidly approached. However, neither Moneysworth nor Leadbetter had prepared any meaningful planning for completion such as owner's inspection and acceptance of the building, or testing, dry-running and production start-up of the production train. They also failed to insist that ED obtain the building occupation certificate. Moreover, due to late delivery of the production train, the "tie-in" of power and other utility connections scheduled for the annual two-week maintenance shut-down could not in fact take place until two weeks later. These factors together resulted in a loss of several weeks of production. Customer delivery dates were missed and some general contractors cancelled their contracts and placed their orders for millwork elsewhere. Finished goods inventories were depleted to the point that other sales opportunities were also lost in the special products areas on which Handys reputation was based. Project Control Costs arising from these and other changes, including the costs of delays in completion, were charged to Handy's account. Project overrun finally became reality when actual expenditures exceeded the budget and it was apparent to everyone that the project was at best only 85% complete. Cashman was forced to scramble for an additional line of credit in project-financing at prime plus 2-1/2%, an excessive premium given Handy's credit rating. From then on, Handy was in a fire fighting mode and their ability to control the project diminished rapidly. They found themselves throwing money at every problem in an effort to get the plant operational. During Handys period of plant upgrading, construction activity in the region fell dramatically with general demand for Handys products falling similarly. Even though Sharpe launched an expensive marketing effort to try to regain customer loyalty, it had only a marginal effect. Post Appraisal The net result was that when the new equipment eventually did come on-line, it was seriously under-utilized. Production morale ebbed. Some staff publicly voiced their view that the over-supply of commercial space could have been foreseen even before the project started, especially the oversupply of retail and hotel space, the prime source of Handy's contracts. John Haywood, not a favorite with the older staff, was blamed for introducing these "new fangled and unnecessarily complicated ideas". Because of this experience, Handy's President Emy Haywood retained project management consultant Win Easley of W. Easley Associates to conduct a post project appraisal. Easley had some difficulty in extracting solid information because relevant data was scattered amongst various staff who were not keen to reveal their short-comings. Only a few formal notes of early project meetings could be traced. Most of the communication was on hand-written memos, many of which were not dated. However, interviews with the key players elicited considerable info, as mentioned above. a)Was the Handys 2010 project well-conceived? Give reasons for your opinion. (2.5 marks) b)Write a simple project scope statement of the Handy 2010 project. Why do you suppose renovation of the President and Executive Vice Presidents offices were included in the project and was that a good idea? (2.5 marks) c)Was Leadbetter qualified to be a project manager? Should Leadbetter (project manager) have been left to run the project? - rationale your answer? (2.5 marks) d)Discuss- how did the Handy 2010 project handle risks? What might they have done better? (2.5 marks) e)What type of contract(s) were awarded in Handys project. Rationalise the choice of contracts in this project (contracting for professional services and construction work). (2.5 marks) f) Identify and describe a set of project schedule milestones from project concept to project completion. What would you have done when you saw that the project would not meet its schedule? (2.5 marks) g)Evaluate project cost performance. Identify two major causes of cost variation. How should the project budget and expenditures be set out for cost control? (2.5 marks)