Turner Construction

Turner Construction faces the problem of whether or not to release the contingency reserve of $500,000 to the owner of the construction project they are working on. At this point, the project is 80% complete and the owner thinks it is far enough along that there won't be any major expenses from this point out that will require Turner to have to use the contingency money. He is adamant about getting this money as he has some other loans to pay down. The territory manager is also feeling some pressure from upper management to release the contingency reserve because they can report this as additional earnings. Turner took a $200,000 loss on a sale and they could use this to counter that loss.

Tuner Construction is the largest general building contractor and construction management company in the United States. They don't have the cheapest prices for their project so they have to gain competitive advantages in other ways. One of the ways they do this is through the Indicated Outcome Report or IOR. This report allows them to easily manage risk and at any time provide themselves and the owner of the project with a prediction on the cost to complete the project. How much of this detail they decide to share with the owner depends on how well they know the owner's line of thinking about the project and how much he/she wants to be involved. Another important piece regarding the IOR is how it is created. Tuner does not allow the managers directly working on each project to complete the IOR's, although they do have input. This is done by a cost engineer who does not report to "line management" so they will report everything as they see it and not move numbers around to potentially hide something.

Another important part of the IOR is the E-Holds (Exposure Holds) and C-Holds (Contingency Holds). E-Holds are reserves that are kept for specific types of jobs on the project. C-Holds are reserves that are kept for more general and generic expenses that may arise. Right now, Turner has $471,000 in E-Holds and $328,000 in C-Holds remaining along with a contingency reserve of $511,000.

One option for Turner is to release the entire contingency reserve that the owner is requesting. This would please upper management because they could recognize a percentage of this as earnings this quarter and the owner would be happy because he was able to get this money back and use it to pay off his other loans. This is a risky option because once Turner releases all of this money, if expenses do end up higher than expected, then this looks bad to management and the stockholders. Turner would either have to convince the owner to return some of the contingency reserves or pay the extra expenses out of pocket. Since the owner already has plans for the contingency money, Turner would end up paying for the extra expenses. This is an option, but not the best one.

Another option that is a much better and safer