Case Study: Construction of a New Corporate Office Building
Background
A multinational technology firm, TechCorp, is building a new corporate office in Silicon
Valley. The building will house 500 employees and include modern workspaces, conference
rooms, a cafeteria, and a data center. The project is a critical component of TechCorp’s growth
strategy, as it will enable the company to centralize its operations and expand its workforce.
The project has a planned duration of 24 months and an initial budget of $50 million. The
budget includes:
$30 million for construction costs (labor and materials).
$10 million for equipment and technology installations.
$5 million for contingency planning (unforeseen expenses).
$5 million for permits, legal, and administrative fees.
Project Timeline and Key Milestones
Month 1-6: Planning and Design Phase
Month 7-12: Foundation and Structural Construction
Month 13-18: Installation of Electrical and Mechanical Systems
Month 19-24: Final Interior Fit-Out and Handover
Initial Cost Breakdown
1. Planning and Design: $5 million
2. Construction (Foundation, Structure, Finishing): $25 million
3. Equipment (IT, office infrastructure): $8 million
4. Permits, Legal, and Miscellaneous Costs: $7 million
5. Contingency: $5 million
Challenges Faced During the Project
By the end of Month 12, several issues emerged that impacted the budget and timeline:
1. Unforeseen Ground Conditions: During the foundation stage, the construction team
encountered unexpected soil conditions that required additional excavation and structural
support, increasing costs by $2 million and delaying the project by two months.
2. Increase in Material Costs: Due to global supply chain disruptions, the cost of steel and
concrete rose by 15%, resulting in an additional $3 million expense for construction
materials.
3. Change in Design: Midway through the project, TechCorp’s leadership requested a
redesign of the building’s data center to support future growth, which added $1 million in
costs and caused further delays.
4. Labor Shortages: A shortage of skilled labor in the region pushed labor costs higher
than anticipated, resulting in an additional $1.5 million in costs.
By the end of Month 18, TechCorp found itself facing a $7.5 million overrun on the original
$50 million budget, and the project was now projected to be 3 months behind schedule.
Cost Control Measures Implemented
In response to these challenges, the project team initiated several cost control measures:
1. Earned Value Management (EVM) Analysis: The project manager began using Earned
Value Management (EVM) to track project performance. The Planned Value (PV) at
Month 18 was $35 million, while the Actual Cost (AC) was $42.5 million, and the
Earned Value (EV) was $30 million. The team calculated the Cost Performance Index
(CPI) and Schedule Performance Index (SPI) to assess performance.
o CPI = EV / AC = $30M / $42.5M = 0.71 (indicating cost overrun)
o SPI = EV / PV = $30M / $35M = 0.86 (indicating schedule delay)
2. Resource Allocation Adjustments: To optimize labor costs, the project team hired a
more flexible mix of skilled and semi-skilled labor. They also introduced overtime shifts
to accelerate progress without further delays.
3. Negotiating with Suppliers: The procurement team renegotiated contracts with key
suppliers to lock in material costs and avoid further price increases. They also looked for
alternative suppliers to reduce costs.
4. Value Engineering: The design team conducted a value engineering review to identify
areas where costs could be reduced without sacrificing quality. They decided to use less
expensive materials in non-critical areas of the building.
5. Revised Contingency Plan: The team revised their contingency plan and allocated $3
million of the remaining contingency budget toward critical project areas, leaving only
$2 million in contingency.
Outcome and Final Cost Analysis
At the project’s completion in Month 27 (three months later than planned), the following costs
were incurred:
1. Planning and Design: $5 million (no change)
2. Construction Costs: $30 million (including material increases and additional structural
support)
3. Equipment and Technology: $9 million (due to design changes in the data center)
4. Permits, Legal, Miscellaneous: $7 million
5. Contingency Used: $3 million (out of $5 million set aside)
The final project cost totaled $54 million, representing an 8% overrun compared to the original
$50 million budget. The team was able to reduce the projected overrun by implementing cost
control measures, but the project was completed three months behind schedule.
Lessons Learned
1. Risk Management and Contingency Planning: TechCorp’s initial contingency budget
was insufficient to cover all unexpected costs. A more thorough risk analysis during the
planning phase could have helped the team anticipate some of the challenges (e.g., soil
conditions, supply chain disruptions).
2. Proactive Cost Control: The use of EVM early on helped the project manager identify
cost overruns and schedule delays, allowing for corrective action. However, earlier
intervention with suppliers and labor resources could have prevented some of the cost
overruns.
3. Scope Changes and Communication: Mid-project scope changes, such as the redesign
of the data center, had a significant impact on both the budget and timeline. Stronger
communication between leadership and the project team could have minimized these
changes.
4. Supplier Contracts: Negotiating material costs and securing fixed-price contracts with
suppliers at the start of the project could have mitigated the impact of global price
increases.
Discussion Questions
1. Cost Control Measures: What other cost control measures could have been
implemented earlier to avoid the $7.5 million overrun?
2. EVM Analysis: How could the project team have used EVM data more effectively to
identify performance issues earlier?
3. Contingency Planning: If you were the project manager, how would you have planned
for contingencies? What percentage of the budget would you set aside for unforeseen
risks?
4. Supplier and Labor Management: Given the labor shortages and material cost
increases, how would you handle supplier negotiations and labor resource allocation
differently?
5. Post-Project Evaluation: How should the company use the lessons learned from this
project to improve cost management on future projects?
Key Concepts in the Case Study
Cost Estimation and Budgeting: Initial project cost breakdown, risk identification, and
contingency planning.
Cost Control: Use of EVM, cost performance index (CPI), and schedule performance
index (SPI).
Variance Analysis: Identifying cost variances and implementing corrective actions.
Procurement and Resource Allocation: Supplier negotiations, labor cost management,
and value engineering.
Risk Management: Planning for unexpected ground conditions, material cost increases,
and design changes.
