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 three-kilometer 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. 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 75% 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 weeks 3 5 7

Probability of a strike of n weeks, on condition that a strike occurs 0.25 0.50 0.25

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
ACTIVITY Days Pesos Days Pesos Days Pesos
A Move in machinery/equipment 12 150,000 6 165,000 4 180,000
B Excavate primary shaft 12 347,500 12 347,500 12 347,500
C Excavate secondary shafts 60 312,500 24 330,000 12 347,000
D Excavate trenches 300 1,685,000 150 2,125,000 100 2,250,000
E Excavate tunnel 305 1,807,500 155 1,955,000 105 2,000,000
F Backfill (trenches only) 50 50,000 25 75,000 17 100,000
G Pipelaying in trenches 50 375,000 25 410,000 17 445,000
H Pipelaying in tunnel 50 275,000 25 285,000 15 300,000
J Pour concrete in trenches 70 570,000 35 582,500 25 592,500
K Pour concrete in tunnel 60 550,000 30 562,500 20 575,000
L Landscape 10 100,000 8 145,000 6 150,000
M Move out 5 25,000 3 37,500 2 50,000
Total Indirect Costs P7,000/day P8,000/day P9,000/day