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MEGATECH INTERNATIONAL INC.1 Mr. Victor delos Reyes, President of Megatech International Inc., stood quietly looking out the window at his 20th floor office in Makati. He was wondering what actually went wrong with his Cytel design and construction management contract which was threatening to get out of control. A few minutes ago, he adjourned an emergency meeting with his design engineering team and his cooperating group of outside engineering consultants. They politely requested that if possible, they all wanted out of the Cytel project citing imperious and over bearing attitude of the clients expatriate technical staff. They stressed that they were also professionals entitled to some degree of respect and that there was no place for abusive language in formal meetings of collegial peers. The day before in a meeting at the construction site, the Cytel project manager and his technical staff walked out of the coordination meeting intended to resolve critical issues on some design problems encountered during the project construction stage. The Cytel project manager was heard saying; "There is no use meeting with you people. We are tired of beating a dead horse". Then he left and carried away with him the entire CyteI's technical staff without saying a word further. The Company Megatech International Inc. (MII) is a firm of consulting and project management engineers affiliated with an Australian-based group of companies. Megatech provided engineering design and construction management services to local industrial and government clients. The company was organized in 1990 starting with tive (5) engineers and since then had gradually expanded its operation eventually employing BG people in 1997. Please see its organizational chart in Annex A and its financial reports for year 1997 in Annex B. As an engineering services company, Megatech did not engage ln actual construction itself, but rather acted for and in behalf of the owner doing the engineering design for its plant facilities, bidding out various working contracts and sub-contracts of the project, overseeing the construction works and reporting regularly to the owner. For its services, the owner paid Megatech a fee based on a percentage of the total cost of the project or a lump sum amount agreed prior. to the engagement of the company. In a typical project, Megatech was usually required to design the facilities of the industrial plant covering its architectural, structural, mechanical, electrical and other engineering works. Further, the company translated the design into bidding documents, conducted and awarded the various bid packages, oversaw the works of the contractors to monitor adherence to engineering designs and specifications; and managed schedules, cost and quality control, and changes in work orders. Cytel Philippines Cytel was a multinational company operating manufacturing facilities for semiconductors and other computer components in the province of Cavite. The products were produced for international distribution. The companys philosophy of performance demanded the highest standard of complete and comprehensive engineering, design, procurement, materials and construction management for all of its engineering projects. lt used a manual of performance

1 This case was written by PROF. GERARDO LIPARDO for class discussion purposes only. Cases

are not meant to illustrate correct or incorrect handling of management problems. ATENEO GRADUATE SCHOOL OF BUSINESS, Copyright 1998.

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standards detailing guidelines in environmental and safety, project control, cost codes, materials management, procurement standards, document control, and security. The head office of Cytel is located in New York and the company has a centralized engineering staff who participated in every major project involving Cytel plants around the world. ln addition, the company has retained engineering consultants who assisted the companys engineering staff on every critical issue arising from project design and implementation. Since the company had other manufacturing plants in various continents in the world, it practiced benchmarking in all its project and operational performance so that it was not uncommon for visiting engineers from other regions to help in the local projects. The Cavite plants necessarily had their own engineering team to handle the local activities. ` Project Background Cytel was expanding in 1997 and it undertook the building of modular warehouses in its various manufacturing plants all over the world. Cavite was one of the sites selected for these facilities. The project required the construction of a modular distribution center with a total area of 7000 sq. meters, fully air-conditioned, and to be provided with processing equipment. shop facilities, and conveying systems as required. Some construction materials and equipment, shop facilities, and conveying systems as required. Some construction materials and equipment were to be supplied by Cytel by their contractors in the United States and other parts of the world. The budget for this project was fixed at P280 million pesos. Cytel claimed that the design of their modular warehouse was 65% completed in their headquarters in New York. Accordingly, their approach was to recruit a local engineering firm to complete or revise the design of the building facilities seeing to it that site specific requirements, i.e., local terrain, layout and soil bearing capacities, typhoon wind load, etc. were satisfied and local building codes and regulations were likewise properly considered. For those services, Megatech was awarded the contract to provide professional services in accordance with the agreed scope of services specified ln an agreement, the applicable technical standards and Cytel's manual of performance standards. The project starting date was scheduled on the second week of July 1997 and the targeted completion date was the second week of February 1998. This timetable provided about eight (8) months of design and construction works and was considered tight in terms of the local industry standards. Please see the GANTT chart as ANNEX C. In terms of work load, MEGATECI-l needed to complete the submission of about 124 engineering contract drawings summarized as follows ln terms of engineering disciplines: Table 1

Schedule of Engineering Drawings Cytel Modular Warehouse Project

Architectural Drawings 31 Structural Engineering Drawings 18 Electrical Engineering Drawings 33 Mechanical Engineering Drawings 15 Fire Protection Drawings 9 Civil, Sanitary & Plumbing 18

Total 124

These design drawings had to be completed in two (2) months time since the bidding schedule was slated to be conducted on the third week of September 1997. It was also understood that

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the preparation of specifications of work packages, equipment, materials and supplies In two (2) bid volumes would have to be completed at the same time to be able to submit complete bid documents to the pre-qualified contractors. Project Organization When Megatech accepted this project, there were already preliminary agreements with Cytel on how the project implementation was to be carried out. Although the building site and its conceptual design were already set, there were still a lot of unresolved issues to be discussed with the local design engineers. The following tasks were clearly identified:

Review the plans and drawings of the 65% completed drawings in York and identify items to be revised and list out drawings to be made to complete the 100% design.

Organize weekly teleconference to review work progress and for all participants to introduce inputs and make comments on the preliminary works of megatech's engineers. Participants to the conference were Cytel's engineers in New York, Costa Rica, Malaysia and Singapore. Drawings and specifications were to be provided through Emails. on a well organized distribution table.

Coordinate with Cytel's purchasing organization in Singapore to check on materials specification and supply and timetable of deliveries.

Make weekly visits to the construction site and confer with Cytel's project engineers to resolve various issues arising from the works in progress.

Assist Cytel's project technical staff in preparing price estimates. Megatech to strictly follow change orders and design modifications policies of Cytel. . Megatech to follow Cytel's procedures for such items as bidding, material selection,

submittals, request for information, progress payments, etc. Since time was of the essence, the management of Megatech drew an organization chart which it deemed appropriate to complete the project on schedule and to comply with the standard of performance of Cytel. Please see Annex D. The Design Work Problems To kick off the design work activities, Cytel organized a conference on the first week of July attended by people who were participants to the project. Victor was very much surprised that 37 people attended the meeting coming from various parts of the world. There were consultants from New York, foreign engineers from Singapore and Malaysia, and the local Cytel staff in Cavite also with expatriates of various nationalities. The Megatech engineering staff expected only a small group of 8 to 12 people from the project Owners which was the common working staff for local projects of this magnitude.

Immediately, the Megatech engineers noticed a potential problem with this kind of project meeting. There were so many inputs coming from the Cytel group, some of them conflicting and design parameters were left hanging after the meeting for further studies. Megatech engineers were used to small groups from clients where immediate agreements were made alter consensus decision making. Victor promptly advised the Cytel project manager that schedules

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cannot be met if no decisions were made on many design issues. The Cytel people made assurances that everything would be resolved through E-mail communications.

Design works immediately started after that meeting but drawings could not be completed because of open issues. The weekly teleconference was of little help since the same conflicts of ideas arose from the participants always delaying critical decisions. A typical minutes of weekly meeting is given as ANNEX E. The Megatech engineers suggested to Victor for the Cytel people to meet among themselves and make final decisions to enable them to proceed smoothly in their work.

On the other hand, Victor began to notice other emerging problems in the execution of the design works. The local E-mail systems always bogged down especially on large volume of drawings `and specification transmittals, the computer-aided-design facilities were found inadequate, and the hired outside consultant engineers were difficult to gather during coordination meetings. All those problems continued to hound the project resulting in gradual slippage on the work timetables.

The delay in the completion of critical design drawings came to a head two weeks before the deadline middle of September. The head office of Cytel in New York was getting furious on the design problems and bombarded the local staff with daily follow up communications. Megatech engineers worked overtime to remedy late submissions but continued to claim that those problems were not their making but that of the Cytel people. The relationships between Megatech and the client staff members deteriorated and nerves began to flare out.

Vlctor and his engineering team decided to meet more often and kept on asking the questions what indeed went wrong. This project was very simple and ordinary compared to the complicated process chemical and electronic plants Megatech designed and constructed in the past yet this undertaking had become so troublesome In comparison.

The design works finally got finished two (2) weeks after the deadline and the bidding to contractors likewise re-scheduled two (2) weeks after the original target date. Cytel claimed to be very unhappy with the results.

The Construction Work Upheaval To avoid similar delays in the construction of the project, both Cytel and Megatech engineers moved quickly to award the project to the winning contractor - in the project bidding. The contractor was considered very respectable and well recognized in the engineering community.

The construction activities mobilized into a good start until a new development came about a Cytel. The head office appointed a foreign project engineering tjrm to monitor the construction on a move to assure the completion of the project on time. The foreign engineering firm was very demanding in its monitoring activities. Many design changes and verifications were used as reasons for the gradual delay in the construction and Megatech engineers were called to the site to carry out design corrections and changes. Some of the corrections were very minor and

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Megatech engineers claimed that in the other projects with the same contractor, these corrections were promptly made even without their presence. Megatech engineers felt that they were being used as a potential excuse in case the project got delayed. ` _

Moreover, the project engineering firm insisted on making design changes which were not included in the original scope of work of Megatech. The design engineers demanded that Cytel issue change orders and pay additional engineering fees. Cytel refused explaining that the changes were made only to attain the original budget of the project which at the time was now about to be exceeded. The Megatech engineers dragged their feet in protest.

The climax of the conflict came when a major change in the sewage disposal design works cropped up. Cytel claimed and supported by the new project engineering team that an error was made by the civil works and sanitary , engineering designers which could cause a substantial increase in project costs. The Megatech engineers concerned claimed that the error was actually originated by Cytel people when they gave their design data input at the start of the project. They supported their stand by producing documentations to that effect.

During this confrontation meeting, the Cytel engineers and their project engineering staff walked out in disgust.

MEGATECH INTL 4 dist -AMegatech annexes