PM under rampant inflation
meeting cost and schedule objectives in Brazil
Project Management in Action
Paul C. Dinsmore, Dinsmore Associates, Dallas, Texas, and Rio De Janeiro, Brazil João Otávio Brizola, EMOP – State Public Works Company, Rio De Janeiro, Brazil
Paul C. Dinsmore
The internationally famous Rio de Janeiro Carnival, certainly the greatest popular folk festival in the world, takes place in a permanent stadium, especially built for the purpose of accommodating the crowds that throng to see the parades that stretch over the four days prior to Catholic Lent each year. The stadium was designed, however, so that much of its space could be used for schoolrooms during the rest of the year. Envisioned in 1983 by internationally-known architect Oscar Niemeyer, it was to some extent a forerunner for a gigantic school building program developed later, because many of the architectural lines and concepts were maintained. The stadium was built in a record-breaking time of four months.
This different kind of school building, nestled in downtown Rio, undergoes a major personality change every year at Carnival time. That's when the structure drops its academic function and becomes the backdrop for the annual event, similar in concept but much larger in magnitude than the New Orleans Mardi Gras. The structure was designed to make this annual shift from the seriousness of the classroom to the frenzy of Rio's Carnival, and back again, with a minimum of effort.
Prior to the construction of the “Passarela do Samba” (Samba Paradegrounds or Carnival Stadium), Rio's parades took place in public streets lined with bleachers and other support structures that were erected before Carnival and taken down thereafter. The cost for this effort was $10 million per year. The project combined the advantages of having a permanent spot for the popular samba festivities and eliminating, in less than two years, the substantial annual cost (the total project cost was only $15 million).
To give the structure additional uses, it was decided to incorporate a permanent “Samba Museum” and an area that could be suitable for shows such as rock concerts, as well as the school classrooms that would be used throughout the year. The museum is located under a giant overhanging marquis that is used for the stage. Above the marquis is a concrete arch that overlooks the square where the spectators congregate for the concerts. The schoolrooms are located under the stadium bleachers. For the parades, the stadium now seats 70,000 Samba fans. For rock concerts and such events, the capacity is for 200,000 people. As an educational facility, it handles 4000 students on a daily basis.
Niemeyer's concept used massive precast concrete pieces as opposed to an alternative proposal involving structural steel. The broad, daring strokes of Niemeyer won out and as of October 5, 1983, the race was onto complete the new structure by parade date: March 4, 1984. Groundbreaking took place on October 17.
The stadium as eventually designed was to use 17,000 cubic meters of reinforced concrete and 85,000 cubic meters of pre-cast concrete. Two basic shapes were envisioned for the pre-cast pieces: hollow section slabs for the floors and ceilings, and “L”-shaped pieces for the bleachers and stairways.
A special three-member committee, composed of the Vice-Governor, a consultant and director of the engineering design firm charged with detailing the architectural concept, and an architect who is the Governor's son, was formed to oversee the project. Five major contracts were eventually let: two for the civil works joint ventures, one for electrical and hydraulic work, one for aluminum framework, and one for fencing. By the Special Committee's own admission, there was almost no formal project management on the undertaking. Said Project Director João Brizola, “We overcame some of the organizational shortcomings because of the extreme pressure and the strong desire to get the job done. The project did serve, however, as a stepping stone to more formal management systems for the major school building project that followed. And in spite of the unconventional management of the Carnival Stadium, it was basically completed on time, to quality standards, and within budget.”
About this Project
The government of the State of Rio de Janero embarked on an ambitious program to improve literacy among its citizens. As part of this effort, 500 new schools were constructed. Unique design and construction concepts resulted in substantial savings in costs and schedule. The stage was set by the process of creating a new stadium facility which taught lessons that facilitated the construction of the 500 schools. All of this was done in an economic environment that was racked by inflation rates on the order of 25 percent per month. Necessity once again has led to important lessons in managing projects.
The project presented major challenges, some of which seemed insurmountable. The main barriers were:
Intense political setting. Governor Leonel Brizola was just returning to Brazilian political life after spending ten years in exile in Uruguay as a result of his opposition to the Brazilian military regime, which had begun transition to democracy in the early 1980s. There was strong pressure on the part of the opposition for the new State Government to show results.
Critical time frame. The four-month schedule seemed so tight at the time that most people simply said that on-time completion would be impossible. The press constantly questioned whether the project would be completed on time and if it would be structurally sound. Failure to complete the project on time would cause a political and cultural disaster.
Lack of planning. Because of the crash nature of the project, there was little time or inclination for conventional project planning. The pressures for getting on with the program and making forward progress made on-the-job decision making the predominant management style.
In spite of these major challenges, the daily project hurdles were somehow handled by the Committee, which was “on call” 24 hours a day. Here are some of the additional issues that had to be dealt with, due in part to the lack of time for up-front planning:
Getting contractors to take on the job. Local contractors initially cried out that the project couldn't be done and refused to participate. Two out-of-state contractors accepted the challenge and formed a joint venture to take on the challenge. At the last minute, the local contractors reconsidered and formed a second joint venture to perform 30 percent of the work.
Management of “out-of-scope” contractual items. It had initially been assumed that the civil works contractors would perform as general contractors and manage the non-civil part of the work as well. Because of major differences regarding pricing of items that were not fully specified in the original contracts, it was decided to spin off parts of the scope into three additional contracts: ( 1 ) general installation of lighting, plumbing, etc., (2) manufacture and installation of aluminum frames and louvers, and (3) fencing.
Need to drive additional structural pilings. One month into the project, it was discovered that additional pilings would need to be driven in order to ensure that the design safety criteria were met. The press created alarm and focused a great deal of attention on this issue. Here, the solution was to take immediate action and simply “weather the storm” created by the press until the issue became “old news.”
Bureaucratic delays within the state and municipal governments. To expedite contracting and procurement, a simplified bidding and purchasing procedure was established by special government concession. Other bureaucratic barriers were immediately taken to the highest level necessary and expedited on a case-by-case basis. In some cases, changes in personnel were made to make sure no additional problems appeared.
Interfacing between the major contractors. The five contractors working on site created daily interfacing and prioritizing issues that had to be dealt with. Since there was no project management group as such, these questions were ultimately resolved by-the Committee, which took on the task as the principal interfacing agent.
The project's stakeholders were many and their relationships complex. The major players were:
Governor Leonel Brizola. The Governor's political future partially hinged on the success of this project.
The Special Construction Committee. This group, consisting of the Governor's son João Otávio Brizola, Vice-Governor Darcy Ribeiro, and consultant Jose Carlos Sussekind, became responsible for both strategic and handson project management.
The press. Largely controlled by opposing political forces, the press kept the project in the limelight. The focus was highly critical, particularly with regard to completion time and structural safety.
The contractors. During a time when the construction business was slow, the project was both an opportunity to take on some much-needed work, and to potentially reap great profits because of the lack of up-front project planning.
Carnival stadium being used as open-air classroom
The architect. Oscar Niemeyer was a political ally of the Governor and Vice-Governor. He was interested in collaborating with the cause and also concerned that this project, bearing his signature, be completed successfully. Despite his advanced age, 82, he was often at the site, helping clarify design details.
The client. Officially the client was RIOTUR (City of Rio Tourist Board), although the project was funded from state coffers.
Suppliers. Some prior suppliers (for the removable bleachers that were previously used, for instance) were strongly opposed to the project and actively lobbied against it. The new suppliers (construction materials, school furnishings, etc.) used the tight schedule as a negotiating tool.
HOW THE PROJECT ENDED UP
As might be expected, the project had a “photo finish.” Although the stadium was completed in time for the big event, it was not without last-minute anxiety. For instance, with less than ten days remaining, one of the contractors was still pre-casting on site some of the gigantic concrete pieces. These were slipped into place just ahead of the school furnishings that also converged on the site at the last moment.
During the Carnival Parade itself, there was a major scare because of the rush to finish the project. What appeared to be a major fissure in one of the structures, which was supporting about 15,000 people at the time, was seen and called to the attention of the fire marshall. As a result, that particular section was to be evacuated for safety reasons, when the construction personnel, who were summoned to the site, discovered that the apparent cracking was caused by an expansion joint that had inadvertently been grouted over in the rush to make things look good for the parade. When the joint expanded as designed, it naturally cracked the grout and therefore caused the alarm. Once this was identified, the evacuation program was abandoned and there were no other incidents. The stadium has continued to be used for the Carnival Parade and other special shows and programs, as well as for housing the educational infrastructure for 4000 students.
STEPPING STONE TOWARD A MAJOR SCHOOL-BUILDING PROGRAM
Aside from its immediate success at Carnival time, the stadium was of considerable value as a pilot project for a major school-building program that was developed later in the Brizola administration. Although the schools were conceptually different, they used similar architectural lines, and were engineered using pre-cast concrete pieces. In terms of project management, it became clear that although it was possible to lead a highly-visible, high priority project to completion using dedication, desire and hard work, a larger program involving hundreds of schools would have to employ state-of-the-art project management tools and expertise. The Carnival Stadium stands as a monument to Rio's popular annual tradition, and at the same time helped create a nucleus of experience that would later be polished and applied to one of the most ambitious school-building programs undertaken in-the world.
João Otávio Brizola
INTRODUCTION TO THE CIEP SCHOOL CONCEPT
The “CIEP School Program” (pronounced “see-epp”) consists of the construction of 500 new grade and junior high schools, each costing in excess of $2.2 million, to be built by December 1993 throughout the State of Rio de Janeiro. Brazil's population is 150 million. Of those Brazilians school age or over, 30 percent are completely illiterate. Two thirds of the remaining 70 percent are at the “barely literate” level, capable of only signing their name and possessing only rudimentary reading skills.
Figure 1. Layout of Standard CIEP School
The first elected state government following 20 years of military dictatorship addressed this situation in 1984 by developing an approach to combat the inadequacy of the school systems. These new schools represent a breakthrough in Brazilian educational concepts, involving all-day schooling with extensive nutrition and health programs. The CIEPs,
Integrated Public Education Centers, were conceived by architect Oscar Niemeyer (who designed Brazil's modem capital, Brasilia) to be located in high-density and high-poverty areas in order to support the surrounding community as well as to provide a facility for teaching.
Each CIEP consists of three buildings, including the main structure that houses offices and classrooms, a kitchen and a dining room, and a medical and dental care center. Another building contains the gymnasium,which can also be used as an auditorium, and the sanitary facilities. The third building is the library.
Here are some of the special features of the CIEP program not found in conventional Brazilian schools: special learning aids for beginning students and for constant repeaters, intensive teacher training in new teaching techniques, facilities for supervised study, development of art and culture, on-site residence facilities for underprivileged children, physical and health education programs, library, evening literacy classes and weekend cultural and community activities. Since most of the students come from underprivileged families and communities, the CIEP concept helps compensate in school what the student misses at home and in the community.
The inaugural Carnival parade in the new stadium
The standard CIEP is constructed on a 10,000 m2 lot (approximately 108,000 sq.ft.); the main building takes up 5400 m2, the gymnasium has 1080 m2, and the library 320 m2. There is also a compact version of the CIEP, especially designed for smaller urban areas, which takes up only 4800 m2 of space.
The CIEPs are prefabricated, making them 30 percent cheaper than conventional buildings. The pre-cast structural pieces, which are put into place by cranes in about ten days, include 10-meter-tall columns, 20-m2 slabs and 23-meter-long beams. They can be erected quickly, in four months, which represents further savings because of the growing cost of materials and labor. They can also be built anywhere there is available space, with preference given to the shanty-towns where the underprivileged local community can take full advantage of the facilities.
One of the innovative touches to the CIEP design includes the exclusion of glass windows, which is possible because of the tropical climate (no heating is required). Permanent adjustable aluminum louvers operating like giant venetian blinds substitute for glass windows and provide for air circulation, protection from the elements and easy maintenance.
SOME HISTORICAL PERSPECTIVE
The program was initiated during the first term of Governor Leonel Brizola (1983 though 1987), who has promoted education throughout his political career. During that period,” 170 schools were built. Consultants and project management companies were also hired to provide support. During the subsequent term, led by an opposing governmental party, the program came to a virtual standstill, and was re-started only in 1991.
To restart the program it was decided to use the municipally-owned construction company RIOCOP and concentrate primarily on those CIEPs located within the city of Rio, since at that time the state-owned company formally charged with construction management responsibilities was not fully prepared to take on such a monumental task. Later it was decided to modernize that state-owned company, EMOP, and place all the remaining CIEPs to be built throughout the State under the management of EMOP.
MANAGING THE PROGRAM
The stated goals for managing the program include the classic targets of “completing the established scope of work on time, within budget, and in accordance with quality specifications.” Another related concern was to establish a methodology such that contractors’ claims could be kept to a minimum.
Here are some highlights from the construction sequence of a typical CIEP school (clockwise, starting upper left): pre-cast columns being erected, vertical structure after columns erected, pre-cast beams being placed, 23-meter beam being placed in gymnasium; completed school buildings, inauguration of CIEP by Governor Leonel Brizola.
The state-owned company, EMOP, is charged with overall management of the CIEP projects. Hands-on project management, however, is handled by an outside engineering consulting company hired specifically for that purpose. Primavera Project Planner software was used for project control, along with complementary software developed by the project management contractor. The project control software is installed on a local area network so that it can be accessed by various sources. Because of the peculiarities of working in an inflationary environment, a firm specializing in cost engineering was also hired.
Since EMOP previously managed small projects using manual systems, a consultant was hired to develop a modernized organizational structure along with thesystems needed to track both the CIEP programs and the other ongoing construction projects being handled by EMOP.
It was decided to divide the construction between five major contractors on a turnkey basis. The contractors are responsible for ground preparation, pre-casting all the pieces, transporting and erecting them, as well as performing the finishing work needed for the school to be completed. In the pre-casting operation, contractors pour up to 300 m2 daily. The quality of the work performed is checked by the project management contractor.
Some Peculiar Twists
Inflation. Average inflation over the period 1983 to 1992 was approximately 25 percent per month! Rampant inflation presents challenges in the areas of estimating, contract management and cash flow forecasting. Since the Brazilian economy has historically been inflationary, this cost engineering difficulty was met by applying traditional price indexing techniques. Contract prices are readjusted monthly to bring their prices up to the original value. Since EMOP is one of several institutions that provide the construction community with official State price indices, the EMOP Price Index was adopted as a basis for readjusting the CIEP contractors’ prices.
Production of projects. From a management standpoint, the CIEPs represent an interesting challenge of combining concepts of production and project management. Each school is a project in itself, yet the construction of 500 schools that are essentially similar provides a need for mass production techniques. The CIEP program represented the first program in Brazil to involve the replication of 500 major projects. This challenge is being met by using the best available project management technology and by constant monitoring of events in order to fine-tune the system for improved results.
Political setting. Since its inception in 1983, the program has been assailed by opposing political parties, with arguments ranging from the overall cost of the program ($1. 1 billion) to the cost of maintaining and operating the schools. The scarcity of state-controlled funds, from which the program is fully financed, creates pressure for syphoning allocations from the school program in favor of other public needs. Strong efforts are made by EMOP‘s directors to maintain the educational program as the number one priority in order to ensure program funding. As a result, payments have fundamentally been made on schedule over the two-year construction period, in spite of monthly disbursements as high as $43 million during peak months.
Bureaucratic governmental procedures. Brazilian laws on public bidding and limitation procedures place a heavy bureaucratic burden on the owner and on project management personnel. This challenge was met initially by factoring into the planning schedule the time needed to do formal bidding procedures, and later by optimizing and revamping existing systems.
MANAGING PROJECT COSTS DURING RAMPANT INFLATION: A Major Challenge for the School Building Program
João Otávio Brizola and Paul C. Dinsmore
Controlling costs on projects becomes particularly challenging where there is a high inflation rate and a constant state of uncertainty regarding the political and economic climate of the government. This was the case for the 500-school CIEP program. Sophisticated indexing systems are required to carry out the basic functions of project management such as cost forecasting, tracking costs against forecast, cash flow management and contract administration in general.
WHAT INFLATION DOES TO COSTING SYSTEMS
Most project costing systems are based on the assumption of a stable currency. When that premise is not the case, standard approaches are rarely adequate. The fact that prices and costs are in a constant state of flux introduces challenges that must be dealt with by using a special system which takes such fluctuations into account. Here are some of those challenges:
Knowing what things should cost. One of the peculiar characteristics in managing projects in unstable economies is that the relative “reasonableness” for what things should cost becomes lost as the inflation rate spirals upward. A system is therefore required to be able to check against price fixing on the part of suppliers and contractors.
Searching for a reliable cost index. When inflation is significant, prices must be readjusted on a monthly basis. Prices in some areas of the economy, however, may vary more than others. For instance, construction costs may be rising at a more rapid rate than the general cost of living. Or, transportation costs may vary at greater degrees than the costs of cement or aluminum or labor. Therefore, it takes a major effort to determine what index, or combination of indices, should be used for escalation purposes.
Dealing with escalation. The need for readjusting prices introduces additional work that is unneeded when currency is stable. Vendors must calculate how much their price is to be escalated at the time the invoice is presented. This calculation may involve a combination of various cost indices. Two invoices are presented: one for the price indicated in the contract, and the other for escalation (which generally becomes much bigger in value than the basic contract price). Once in the client's hand, all the figures and criteria for calculating the escalation by the vendor must be checked and approved prior to payment. If the payment is paid after the due date (which is not uncommon), then an additional invoice must be processed to account for the inflation that took place between the due date and the actual payment. This amounts to escalation on top of escalation.
Forecasting costs. From a cash-flow standpoint, forecasting the amount of cash to have on hand in the future is an almost impossible task. Forecasts are therefore made on a present-value basis (the value of currency as of a given date). If necessary, inflated values can be projected to the future for purposes of cash flow. Yet from a cost standpoint, all currency values must be related to a given period of time. Government agencies are normally required by law to work in national currency, no matter how inflationary it may be, thus eliminating the expedient of working in a hard foreign currency. An additional complicating factor for forecasting costs is the fact that prices for an identical item may fluctuate wildly because of the historical value of stored goods and materials.
Completed campus shown in a typical rural setting
HOW POLITICAL UNCERTAINTY AFFECTS MANAGING A PROJECT
All projects are affected by government actions, whether they be sponsored by the private or the public sector. Those that are government-owned and -controlled such as the CIEP program, however, suffer the direct effects of political uncertainty. Here are some of the scenarios that must be managed during the school building program.
Changes in rules and procedures by the government. In situations of high instability, governments often make drastic moves in an attempt to set the economy straight, or as stop-gap measures to fend off impending problems. Such moves may involve freezing assets, restructuring taxes, changing the banking system, altering the name of the currency and instituting compulsory loans. Many of these changes took place during the CIEP program and had an immediate impact on the project schedules and project cost structures.
Sudden changes in priorities. Federal and local government authorities make rapid changes to previous programs. This is because of political bargaining, external influence (the June 1992 Earth Summit in Rio de Janeiro, for instance), or reallocation of work because of dwindling funds. Changes in the government, such as replacement of high-level officials, also tend to bring about radical revision in the priorities of ongoing programs.
Government control and influence on prices. In order to artificially control inflation, the government may choose to freeze certain prices that are within its sphere of influence (this may involve all prices in some cases). In situations where the price indices are government-controlled, the indices might not reflect the full impact of inflation, thus adversely affecting the contractual escalation of vendors performing work on the contract. As a consequence, these items may disappear from the marketplace, and then reappear with black-market escalation, making it impossible for a government agency to legally acquire such goods or services.
“Wait and see” attitude when the political situation is particularly unstable. When things get extremely unstable, the entire economy may slow down as all parties watch and wait. Such was the case in Brazil during the impeachment process initiated against President Collor in 1992. Although the government institutions continued on a business-as-usual basis, undeniably the overhanging political cloud affected the nation's decision-making processes at all levels of economic activity.
IN SEARCH OF A STABLE CURRENCY Which Index Should Be Used?
Average inflation over the period 1983 to 1992 was over 25 percent per month! Rampant inflation presents challenges in the areas of estimating, contract management and cash flow forecasting. Since the Brazilian economy has historically been inflationary, this cost-engineering difficulty is met by traditional price indexing techniques. Contract prices are readjusted monthly to bring them up to their original value. Since EMOP is one of several institutions that provide the construction community with official state price indices, the EMOP Price Index was adopted as a basis for escalating the CIEP contractors’ prices. The EMOP Price Index, published monthly since 1975, is one of the most used in Brazil, by both public and private institutions. It covers over 6000 items, each of which are surveyed each month. EMOP maintains an entire department of over 100 people to carry out various cost engineering-functions. Over half of the activities performed by this technical department involve working with inflation-related activities.
Figure 2. Variation of Different Inflation Indices, July 1992- June 1993
Figure 3. Influence Related Activities for CIEP School Program
There are other major institutions in Brazil whose principal function is to determine the inflation rate of the previous month and translate that rate into an escalation index for use in readjusting contract prices. Some of the indices related to the construction industry are:
- FGV – A foundation that publishes federal and state cost indices
- PINI – Privately owned cost engineering company
- SINDUSCON — Union of Constructor's Index
- IGPM - Cost of living index issued by a government agency
Another complicating element is the fact that many contracts are permanently tied to a given index by law, and prices are therefore automatically adjusted in accordance with that index, whether or not it fully reflects the inflation rate. This automatic escalation, when it occurs over an extended time period, results in distortion of the original contract values.
The “right” index is that which has a basic price composition consistent with the item being escalated (cost-of-living might not be right for a cutting-edge hightech contractual item, for instance). Assuming that the monthly pricing surveys are reliable, the adjusted prices will reflect the fair value of the contract item. Since price variations fluctuate considerably from one application to another, there is a strong tendency toward generating numerous indices, even within the same industry. Also, labor agreements are made through different trade unions on a monthly-to-quarterly basis. This gives additional justification for having multiple indices available.
A SYSTEM FOR MANAGING COST ESCALATION INDICES
In inflationary economies, a specific system is required for dealing with price escalation of contracted goods and services. Such a system is based on the need for a reliable index to convert prices from the contract base date to the billing date. This indexing systems calls for performing additional work not required in non-inflationary settings. (See Figure 3).
Some of the inflation-related activities needed to carry out basic cost engineering and contract management functions include surveying current market prices, calculation of monthly price index, quantity measurement of work performed, calculation of escalated prices, and inflation forecasting for the following month.
These activities interface with the standard procurement management system and are required to accurately escalate services, materials, equipment and labor needed to perform the project work. The procurement items emanate from conceptual and detailed design specifications and ultimately result in final installation at the construction site. It is during the procurement and contract management cycles that the challenges in dealing with inflation appear.
The system summarized in Figure 3 shows the areas occupied by inflation-related activities and the interfaces with conventional contract management and costing requirements. The “inflationary loop” not only adds complexity to the situation, but also results in additional effort, cost and time.
A high inflation rate and a constant state of uncertainty regarding the political and economic climate of the government are particularly challenging for controlling costs on projects. These factors make it necessary to develop sophisticated indexing systems to carry out many of the basic functions of cost management, such as forecasting, tracking actual costs against forecast, cash flow management and contract administration.
Inflation influences project management costing systems in the following ways:
- Distorts the perception of “what things should cost”;
- Creates a need for a reliable indexing system;
- Causes additional bureaucracy for dealing with the need to escalate prices;
- Introduces complications for forecasting costs;
- Provides contractors with opportunities for claims.
Political uncertainty, which is also one of the causes for inflation, affects projects and their costing systems because of:
- Changes in rules and procedures by the government;
- Sudden changes in priorities;
- Government control and influence on prices;
- “Wait and see” attitude when the political situation is particularly unstable.
For the CIEP school building program, the search for a stable currency (reliable index) led to developing a specific index for the special type of construction used in building the structures. Since the government client (EMOP) has in-house capacity for generating and managing indices, that capacity is used to make the cost engineering procedure as reliable as possible for the CIEP program.
A system for managing cost escalation indices, which clearly establishes information flow and interfaces with conventional cost engineering requirements, is needed to deal with the effects of inflation. Although such a system implies considerable extra work, it is a requirement in order to track costs on projects set in inflationary economies.
Paul C. Dinsmore is the managing director of Dinsmore Associates, which has offices in Dallas, Texas, and Rio de Janeiro, Brazil. He is the author of six management books, including The AMA Handbook of Project Management and Human Factors in Project Management. He has performed consulting work extensively in North and South America, Africa, and Europe. He has written over 60 articles and papers and actively participates in PMI and INTERNET.
João Otãvio G. Brizola is president of EMOP and RIO-COP state-owned companies charged with constructing hundreds of schools and other public buildings throughout the state of Rio de Janeiro, Brazil. He has been site director for Rio's world famous Carnival Stadium and now supervises the revamping of the world's largest stadium, Maracana. He is the author of articles and papers and an active member of PMI, AACE and INTERNET
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