Harvard Case - The StarNight Hotel Construction Bid: Real Time Competition on Schedule, Scope, and Cost
"The StarNight Hotel Construction Bid: Real Time Competition on Schedule, Scope, and Cost" Harvard business case study is written by John D. Macomber. It deals with the challenges in the field of Finance. The case study is 11 page(s) long and it was first published on : Nov 18, 2008
At Fern Fort University, we recommend that StarNight Hotel proceed with the construction bid, but with a revised approach that prioritizes cost optimization, schedule adherence, and risk mitigation. This strategy involves a combination of financial analysis, capital budgeting, and risk assessment to ensure the project's profitability and success.
2. Background
The case study focuses on StarNight Hotel, a company bidding on a new hotel construction project in a competitive market. The company faces real-time challenges related to schedule, scope, and cost, with competitors constantly adjusting their bids. The main protagonists are the project manager, responsible for managing the bid and construction, and the CEO, who needs to make the final decision on whether to accept the bid.
3. Analysis of the Case Study
To analyze the situation, we can utilize a framework that combines financial analysis, capital budgeting, and risk assessment.
Financial Analysis:
- Financial Statements: Analyzing StarNight's financial statements, including the balance sheet, income statement, and cash flow statement, is crucial to understand the company's current financial position and its ability to undertake the project.
- Ratio Analysis: Calculating key ratios like profitability ratios (e.g., gross profit margin, net profit margin), liquidity ratios (e.g., current ratio, quick ratio), and asset management ratios (e.g., inventory turnover, accounts receivable turnover) provides insights into the company's financial health and operational efficiency.
- Cost of Capital: Determining the cost of capital, which represents the minimum return required by investors, is essential for evaluating the project's profitability.
- Break-even Analysis: This analysis helps determine the minimum revenue required to cover the project's fixed and variable costs, ensuring the project's financial viability.
Capital Budgeting:
- Net Present Value (NPV): Calculating the NPV of the project, considering the time value of money, helps assess its long-term profitability.
- Internal Rate of Return (IRR): The IRR is the discount rate that makes the NPV of the project equal to zero. Comparing the IRR to the cost of capital helps determine the project's attractiveness.
- Payback Period: This metric assesses the time it takes for the project's cash inflows to recover the initial investment.
Risk Assessment:
- Sensitivity Analysis: This analysis examines the impact of changes in key variables (e.g., construction costs, occupancy rates) on the project's profitability.
- Scenario Planning: Developing different scenarios (e.g., optimistic, pessimistic, most likely) helps assess the project's potential outcomes under various market conditions.
- Risk Mitigation Strategies: Identifying potential risks and developing mitigation strategies (e.g., insurance, contingency funds) is crucial for managing uncertainty.
4. Recommendations
Cost Optimization:
- Negotiate with Suppliers: StarNight should leverage its bargaining power to negotiate favorable prices with suppliers for materials and services.
- Explore Alternative Materials: Evaluating alternative construction materials that offer similar functionality at lower costs can significantly reduce expenses.
- Streamline Construction Processes: Implementing lean construction practices and optimizing project workflows can enhance efficiency and reduce waste.
- Activity-Based Costing: Utilizing activity-based costing can help identify and allocate costs more accurately, allowing for better cost control.
Schedule Adherence:
- Detailed Project Plan: Developing a comprehensive project plan with clear milestones, deadlines, and resource allocation is essential for maintaining schedule adherence.
- Regular Progress Monitoring: Implementing robust project monitoring systems and conducting regular progress reviews can identify potential delays early on.
- Risk Management: Proactively identifying and mitigating potential schedule risks, such as weather delays or labor shortages, is crucial.
Risk Mitigation:
- Contingency Planning: Setting aside contingency funds to address unexpected costs or delays is essential for managing risk.
- Insurance Coverage: Securing appropriate insurance policies, including construction insurance and liability insurance, can protect StarNight from financial losses.
- Contractual Protections: Negotiating clear contractual terms with suppliers and subcontractors, including clauses for price adjustments and performance guarantees, can mitigate potential risks.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: StarNight's core competency lies in hospitality management. The project aligns with the company's mission to provide high-quality accommodations and experiences.
- External Customers and Internal Clients: The project caters to the needs of both external customers seeking hotel accommodations and internal clients, including employees and stakeholders.
- Competitors: The recommendations consider the competitive landscape and aim to provide a competitive edge by optimizing costs, adhering to schedules, and mitigating risks.
- Attractiveness: The recommendations are supported by quantitative measures, including NPV, IRR, and payback period, demonstrating the project's financial attractiveness.
6. Conclusion
By adopting a strategic approach that prioritizes cost optimization, schedule adherence, and risk mitigation, StarNight Hotel can increase the likelihood of securing the construction bid and achieving project success. This approach will ensure the project's profitability and contribute to the company's overall growth strategy.
7. Discussion
Alternative options not selected include:
- Abandoning the bid: This option would avoid the risks associated with the project but also miss out on potential growth opportunities.
- Accepting the bid without modifications: This approach could lead to financial losses if the project experiences cost overruns or delays.
Key assumptions:
- The market demand for hotel accommodations in the project's location remains strong.
- Construction costs and labor availability remain relatively stable.
- StarNight's financial resources are sufficient to cover the project's costs.
8. Next Steps
- Develop a detailed project plan: This plan should include specific milestones, deadlines, and resource allocation.
- Negotiate with suppliers and subcontractors: Secure favorable contracts that address pricing, performance, and risk mitigation.
- Establish a robust project monitoring system: Regularly track progress, identify potential delays, and implement corrective actions.
- Secure necessary financing: Arrange funding for the project through a combination of debt financing, equity financing, or a combination of both.
- Implement risk mitigation strategies: Develop contingency plans, secure insurance coverage, and negotiate contractual protections.
By implementing these recommendations and next steps, StarNight Hotel can increase its chances of winning the bid and successfully completing the project, contributing to its long-term growth and profitability.
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Case Description
The case is intended for use with the HBS Educational Technology Group "Construction Bidding Simulation." Material that can be taught includes quantity survey methodology (from the case); analyzing preliminary estimated costs per building trade (from the discussion questions); playing the multiparty real time competitive bid simulation to receive and process market costs; and debriefing on which bids should be accepted and why. Discussion points include what criteria to use in making the decision, how to process subcontractor bids, and how to award contracts. Many of the issues can be extended from construction into any bidding situation and any industry with multiple subconsultants or vendors.
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