Reference no: EM131052043

Telestar International

On November 15, 1998, 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, 1999, 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 imposed 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. Postanalysis 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?