The Archinomics Group, an interdisciplinary consulting firm that provides management services for capital projects, announced in June, 1996, the September 1996 substantial completion of the Tver Universal Bank headquarters complex, one of the first modern structures built in the new Russia. Completion of this new private bank placed Archinomics and its construction client, Hudson Partners (Chicago), in the small group of western companies that have successfully proceeded with construction projects in Russia. Even more impressive, Archinomics designed and constructed the project in 30 months using a unique combination of prefabricated building systems, foreign suppliers and subcontractors, American management and technologies, and local labor.
Because of its past experience managing large projects and its prior involvement (since 1990) in Central and Eastern Europe, Archinomics realized at the 1993 outset that it would have to overcome several potential problems in order to succeed. First, they would need to satisfy the triple constraints of cost, schedule, and performance that accompany any large project. However, in this Russian case, the challenge would be magnified by language barriers, differing national standards, and a nine-hour time difference between the construction site in Tver and the management offices in Chicago. In addition, the project was complicated by a pronounced lack of local construction talent in Russia. This created several additional problems: procuring building components from Western and Central European countries, passing hostile customs regulations, and installing state-of-the-art technology with no local expertise.
Throughout the project, cost reduction was paramount. In its initial 1993 proposal to its Russian client, Tver Universal Bank, Archinomics estimated all costs (in both Russian and U.S. currency) and presented several cost level building options. The client selected the mid-priced option, choosing to spend approximately $US 800 per square meter. Since most projects in Russia in 1993 were being built for an average cost of $US 1500 per square meter or more, Archinomics needed to conserve costs in every possible way. For example, at one point after the conceptual design phase, Archinomics even changed engineering firms in order to find a firm that was sufficiently cost-conscious. Ultimately, the battle to conserve money was largely successful in spite of multiple client changes that resulted in several schedule delays. The final cost per square meter was roughly $1380—still well below the market average. All project payments were made in U.S. dollars and deposited in a U.S. bank from which Archinomics managed the international disbursement to all individual subcontractors.
In addition to being cost-conscious, the Russian private bank owner was also schedule-conscious; they originally wanted to be able to occupy the new bank headquarters less than 14 months after the construction starting date. To meet this aggressive schedule, Archinomics adopted a modified fast-track approach, meaning that several project design and construction phases were occurring simultaneously at any given time. A project of this type presents more of a management challenge because the final scope and costs are uncertain even as several project aspects are progressing. Archinomics met the challenge through a unique combination of on-site management, telecommunications, a never-ending flow of faxes, and monthly commutes to Russia for site and client visits. Ultimately, owner-initiated changes would increase the project schedule.
The third project constraint was performance. Accustomed to the poorly-constructed buildings currently found in most Russian towns and cities, the owner requested that this bank headquarters be constructed according to basic yet adequate western specifications, which, in contrast to other Russian buildings, would seem very high quality. The resulting specifications were written in both Russian and English and had to comply with both western standards and archaic yet fast-changing Russian standards. Since Archinomics procured project elements internationally, project personnel had to familiarize themselves with several national standards, mainly American, British, French, German, and Russian. To ensure quality despite the language barriers and differences in national standards, Archinomics worked closely with translators who were knowledgeable both about engineering and about business.
In addition to the usual project constraints of cost, schedule, and performance, Archinomics had to overcome other obstacles that arose as a result of working in one of the world's newly emerging countries. For example, very little local talent was available to construct and install the necessary elements for building and furnishing the headquarters. Archinomics solved this problem by procuring all but the most basic construction elements (i.e., all except concrete and steel) outside of Russia. The building was designed and built using prefabricated exterior facades manufactured in Finland. Precast floor systems were also manufactured in Finland and shipped to the site. The mechanical and electrical components came from Belgium and France, and the banking, security, and communications systems were from the United States, as were most of the general office systems (i.e., furniture). Specialty interior design elements, such as special desks and chairs, were from Switzerland and Italy. Other specialty components, such as the skylights and revolving doors, were from Denmark and the Netherlands, respectively. This unique international approach to procurement presented special difficulties in meeting specifications: Archinomics had to ensure that each contractor knew about and conformed to the governing Russian standards.
Archinomics' procurement strategy presented another management challenge as well. Since everything had to be manufactured elsewhere and shipped to the site, at times many of the project's 180 separate containers were simultaneously making their way over sea or land toward Tver. These containers not only came through several ports of entry in Russia, but they also had to pass through Russian customs, which were not simple, not friendly to foreign products, and not adequately defined to accommodate the high technology products required for this project. For example, while United States customs might include regulations for an air conditioning unit, meaning that an importer could simply certify the entire unit, Russian customs regulations, unfamiliar with such technologies, interpreted an air conditioning unit as a series of component parts, each of which must be certified individually. This meant that every component in every unit had to individually pass customs—turning the customs process into a time-and-resource-consuming bog. Archinomics dealt with this obstacle by keeping abreast of the ever-shifting regulations, hiring local specialists whose job it was to smooth the way with specialized studies, and exercising great amounts of patience.
The use of state-of-the-art foreign technology created yet another project management challenge: finding laborers who were skilled enough to install it. Archinomics solved this problem in two ways: using foreign supervisors to train local laborers to do some of the work and bringing in foreign laborers to do the rest. Generally speaking, the general project labor force consisted of local workers with foreign management. U.S.-based Archinomics managed the project through an effective combination of telecommunications, permanent site staff, specially skilled foremen, and monthly site visits. Besides getting the job done on time and on budget, this teaming achieved some technology transfer to the local laborers and ultimately benefited the local economy.
Not only did Archinomics successfully progress the Tver project—among the first of such western developments in Russia—but they have satisfied the triple constraints of cost, schedule, and performance. The project was complicated by international components, ever-changing Russian standards, and a nine-hour time difference between the U.S. management office and the Russian construction site. Archinomics has progressed the project from design through construction in 30 months despite the fact that the bank's Russian owner, unaccustomed after the long reign of Communism either to having choices or making decisions, has changed its mind about the project design several times during the course of construction. The building will be ready for occupancy in September 1996—making Archinomics one of few western companies to successfully build in the new Russia. And Archinomics' appetite for European projects continues to grow; already the firm is involved in discussions for projects in Russia, the Czech Republic, Poland, Hungary, Portugal, and the Ukraine.
After-ward: In July, 1996 the Russian Central Bank revoked Tver Universal Bank’s charter, for largely political reasons. The Bank’s headquarters’ operation was immediately closed, as were its thirty-seven branches throughout the Russian Federation. The more-than five hundred employees scheduled to move to the new building in September were dismissed from one day to the next. The project was, with all materials and equipment delivered and on-site, suspended thirty days short of opening. Team Archinomics concluded its assignment as stated above, a financial and contractual success for its American client, but short of seeing satisfied Russian bankers, working in a new state-of-the-art headquarters.
Construction Management in Russia: A Real project Gets Real Results
The Archinomics Group, an interdisciplinary consulting firm that provides management services for capital projects, announced in June, 1996, the September 1996 substantial completion of the Tver Universal Bank headquarters complex, one of the first modern structures built in the new Russia. Completion of this new private bank placed Archinomics and its construction client, Hudson Partners (Chicago), in the small group of western companies that have successfully proceeded with construction projects in Russia. Even more impressive, Archinomics designed and constructed the project in 30 months using a unique combination of prefabricated building systems, foreign suppliers and subcontractors, American management and technologies, and local labor.
The project began in August of 1993 when Hudson Partners, a Chicago-based export company, asked The Archinomics Group to serve as executive project manager for a new "bank of the future" complex in Tver, Russia. Hudson Partners selected The Archinomics Group because of their experience in the international real estate and construction arena; the firm had already successfully managed several large North American projects and had achieved prior success in Central and Eastern Europe since 1990. As project managers, Archinomics provided the following services to its client, Hudson Partners: project strategy development, project design, cost management, procurement, logistics management, and installation management.
Project Strategy Development: Archinomics' initial conceptual research for the Russian project revealed that in the absence of local talent, the Russians have historically looked beyond their own borders for construction expertise. To succeed, Archinomics' project strategy would have to compensate for this absence of local industry, crafts, supplies, and talent. Thus, Archinomics developed a design and construction strategy that minimized the need for site-built systems. Nearly all construction elements, from the exterior enclosure systems to the mechanical and banking components, would have to be procured and manufactured outside of Russia and shipped to the site in Tver ready for installation.
Project Design: In keeping with its strategy of avoiding site-built systems, Archinomics instructed the project architects, RTKL's London office, to maximize the use of assemblies and prefabricated systems in the project design. Archinomics also instructed the project engineers, Oscar Faber of London, to keep the building's structural, mechanical, and electrical systems as simple as possible. These systems not only had to be easy to install, given the shortage of local talent, but they also had to be rugged and near fail-safe in order to withstand Russia's harsh environmental conditions.
Cost Management: Archinomics instructed the designers and engineers, RTKL and Oscar Faber, that keeping costs low was of the utmost importance. The majority of developers who contemplated building in Russia in 1993 figured an average project cost of $1500 to $2500 per square meter. In sharp contrast, Archinomics' target cost for the designed Tver project was just $800 per square meter. Throughout the project, Archinomics kept cost uppermost in their minds, at one point during the conceptual design phase even changing engineering firms in order to find a firm that was sufficiently cost-conscious. All project elements underwent strict value engineering. The mechanical and electrical systems costs, for example, were reduced by over 50 percent from conceptual engineering to construction contract. Ultimately, the battle to conserve money was largely successful in spite of multiple client changes that resulted in several schedule delays. The final cost per square meter was roughly $1380—still well below the market average. All project payments were made in U.S. dollars and deposited in a U.S. bank from which Archinomics managed the disbursement to individual contractors.
Procurement: Archinomics' design strategy dictated that all but the most basic construction elements (i.e., cement and steel) had to be procured outside of Russia. For example, the building was designed and built using prefabricated exterior facades manufactured in Finland. Requiring only hanging on the structural steel frame once they reached the construction site, these facades were in full "floor to floor" and "bay to bay" sections, meaning that they reached from floor to ceiling and from column to column and were roughly 10 feet by 30 feet in size. Precast concrete floor systems were also manufactured in Finland and shipped to the site. The mechanical and electrical components came from Belgium and France, and the banking, security, and communications systems were from the United States, as were most of the general office systems (i.e., furniture). Specialty interior design elements, such as special desks and chairs, were shipped from Switzerland and Italy. Other specialty components, such as the skylights and revolving doors, were from Denmark and the Netherlands, respectively.
Logistics Management: Archinomics' unique approach to procurement meant that at times many of the 180 separate containers were simultaneously making their way over sea or land toward the job site. Each of these containers had to pass through Russian customs, a long-standing bureaucracy which is complex, hostile to foreign products, and largely unable to accommodate new high technology products like the ones procured for the Tver project. For example, while United States customs might include regulations for an air conditioning unit, meaning that an importer could simply certify the entire unit, Russian customs include regulations for every component in the air conditioning unit. This meant that every component in every unit had to individually pass customs—turning the customs process into a time-and-resource-consuming bog. As project manager, Archinomics dealt with this obstacle by keeping abreast of the ever-shifting regulations, hiring specialists whose job it was to smooth the way with specialized studies, and exercising great amounts of patience.
Installation Management: The use of state-of-the-art foreign technology created yet another project management challenge: finding laborers who were skilled enough to install it. Archinomics solved this problem in two ways: training local laborers to do some of the work and bringing in foreign talent to do the rest. Generally speaking, the project labor force consisted of local subcontractors and laborers with foreign management and technical advisors.
Archinomics' project management was complicated by the nine-hour time difference between the construction site in Russia and the management offices in suburban Chicago. To overcome this challenge, Archinomics used an effective combination of tele-communications, permanent site staff, specially skilled foremen, and monthly site and client visits. Besides getting the job done, this teaming allowed technology transfer to the local laborers and ultimately benefited the local economy.
As project managers, Archinomics has succeeded where others have not. Not only will the Tver project be completed—among the first of such western developments in Russia—but Archinomics has done so using an international team and a modified fast-track approach, which enabled them to meet an aggressive design and construction schedule spanning just 30 months. The Russian clients, unaccustomed after the long reign of Communism to having choices and making decisions, changed their minds about the project design several times during the course of construction. In spite of this, the building will be ready for occupancy in September 1996—making Archinomics one of few western companies to successfully build in the new Russia. And Archinomics' appetite for European projects continues to grow; already the firm is involved in discussions for projects in Russia, the Czech Republic, Poland, Hungary, Portugal, and the Ukraine.
After-ward: In July, 1996 the Russian Central Bank revoked Tver Universal Bank’s charter, for largely political reasons. The Bank’s headquarters’ operation was immediately closed, as were its thirty-seven branches throughout the Russian Federation. The more-than five hundred employees scheduled to move to the new building in September were dismissed from one day to the next. The project was, with all materials and equipment delivered and on-site, suspended thirty days short of opening. Team Archinomics concluded its assignment as stated above, a financial and contractual success for its American client, but short of seeing satisfied Russian bankers, working in a new state-of-the-art headquarters.
Project Management for An American Constructor in Russia: Getting In, Getting Done, Getting Out
Winnetka, IL, June 28, 1996 [Updated March 1, 1998] — The Archinomics Group, an interdisciplinary consulting firm that provides management services for capital projects, announced in June, 1996, the September 1996 substantial completion of the Tver Universal Bank headquarters complex, one of the first modern structures built in the new Russia. Completion of this new private bank placed Archinomics and its construction client, Hudson Partners (Chicago), in the small group of western companies that have successfully proceeded with construction projects in Russia. Even more impressive, Archinomics designed and constructed the project in 30 months using a unique combination of prefabricated building systems, foreign suppliers and subcontractors, American management and technologies, and local labor.
The project began in August of 1993 when Hudson Partners, a Chicago-based export and construction company, asked The Archinomics Group to serve as executive project manager for a new "bank of the future" complex in the Moscow–St. Petersburg corridor city of Tver, Russia. The owner, a new Russian bank, wanted a turnkey, design-build contract and a single foreign contractor who would assume all responsibility and risk. Archinomics (on its first visit to Russia) won the contract for its American construction client by agreeing to assume all construction-related risks and by adding to its usual services the additional one of American banking operational consulting. This additional service differentiated the American proposal from its Korean, German, Turkish, and Italian competition. Once selected, Archinomics immediately began employing risk-management and risk-reduction tactics.
Historically, Russian climatic, political, and cultural elements have bogged down any foreign offensive, business or otherwise. Thus, from the project's outset, Archinomics conceptualized its assignment for Hudson Partners in three steps: getting in, getting done, and getting out; while protecting the interests of its American client at every step. As project managers, Archinomics realized that it faced three major risks: cost risk, schedule risk, and performance risk. To minimize these risks, Archinomics would need to negotiate a sound contract, develop a solid financial project structure, and perform exceptionally well in the actual construction of the project.
Cost Risk: Archinomics minimized the cost risk of working in the hyper-inflationary Russian economy in several ways. First, it secured project payment in U.S. dollars paid to an account at a Chicago bank. Second, it secured full prepayment for the design phase of the project and a significant advance payment for the construction phase, meaning that the working capital for the project was funded wholly by the owner. Third, it incorporated into the contract a seven-day invoice payment requirement, backing up that requirement with a quick suspension clause for nonpayment. In other words, if the owner failed to pay within seven days of invoice, Archinomics could contractually suspend all construction until full payment was made. Archinomics actually evoked the quick suspension clause—effectively stopping work on the project and securing full payment—on two occasions. In general, however, the owner made payments an average of ten days after receiving an invoice, significantly faster than domestic industry standards.
In addition to making highly structured payment arrangements, Archinomics reduced the cost risk by enforcing a strict procedure for initiating and completing change orders (which proceeded from the owner in an ongoing stream and ultimately more than doubled the project budget). Archinomics also achieved project budget increases to match these continual owner-initiated changes. For example, when the local project designer modified the original cost-efficient building mass, Archinomics sought and obtained a 25 percent budget increase to reflect the project's increased size, its more complex design, and the construction delay that resulted from the necessary foundation modifications. When the original budget-conforming facade was enhanced (and the cost increased) by upgraded materials, Archinomics obtained another increase in both budget and schedule. When a reorganization in bank personnel resulted in a shuffle of interior office plans and added expensive new materials, furnishings, and equipment, Archinomics obtained a series of significant budget and schedule increases. And when the Russian Federation modified its value-added-tax structure midway through the project, Archinomics successfully modified the contract budget to exclude all taxes from the budget.
After a continual maelstrom of owner-initiated changes and Russian tax regulation duplicity, Archinomics successfully modified the contract from a risky lump-sum-cost structure to a cost-plus-overhead-and-profit structure. This eliminated most of the project's remaining cost risk and ensured that Hudson Partners (Archinomics' American construction client) would make a definable profit on the project.
Schedule Risk: The original project schedule, crafted in October 1993, included only three months for conceptual design, one month for client and bureaucratic acceptance of the design, and 14 months for construction. To meet this aggressive client-requested schedule, Archinomics adopted a modified fast-track approach, meaning that several project design and construction phases were occurring simultaneously at any given moment. With this approach, Archinomics was able to begin construction on schedule in March 1994 using only conceptual drawings. Through the continual onslaught of internal owner-initiated changes and external bureaucratic and importation delays, Archinomics successfully extended the completion schedule by another ten months. When Archinomics succeeded in converting the contract to a cost-plus structure, the schedule risk posed by a fixed completion date was eliminated altogether.
Performance Risk: From the beginning, Archinomics realized the limitations of the Russian construction industry and the difficulty a foreign company might have completing a project on Russian soil. Thus, Archinomics decided to reduce or eliminate many potential problems by minimizing the use of site-built systems (opting instead for prefabricated, pre-engineered and panelized ones) and by using simple construction systems wherever possible. For example, the final design included a prefabricated exterior enclosure system manufactured in Finland and trucked to the job site in Tver. Requiring only hanging on the structural steel once they reached the construction site, these exterior facade assemblies were in full "floor to floor" and "bay to bay" sections, meaning that they reached from floor to ceiling and from column to column and were roughly 10 feet by 30 feet in size. In addition, sensing that poured-in-place level floors would be time-consuming and difficult to achieve, Archinomics used a pre-cast concrete floor system, engineered in Finland and produced in Russian under Finnish supervision. And, in the absence of local craftsman qualified to do interior construction, Archinomics designed the project to include a largely open plan format using office panels built in the United States and Italy. Finally, observing that Russian stair builders often compensate for unequal construction with an off-cadence final stair, Archinomics incorporated pre-engineered stairs throughout the project. To construct the required walls on-site, the project did so with supervision and qualified craftsman brought from Poland, the Ukraine, and the United States.
Lethargy, inertia, and resistance were constant obstacles. As the largest and most visible project in Tver (a city of nearly one million people), the bank headquarters attracted an enormous amount of attention. Local regulatory officials seemed to take an adverse personal interest in the project, visiting the building site almost daily with an endless stream of tests and requests. The fire marshal was among the most fanatic bureaucrats to take an interest in the project; his demands inhibited progress significantly and added several months to the project schedule. Not even the bank's owner, Tver's largest and most viable business, seemed able to persuade the local bureaucrats to let the project progress unhindered. Ultimately, however, it was the Russian tax authority who impeded progress the most. Having already collected the normal tax (totaling 30 percent of construction costs) on the project, in the build-up to this year's Russian presidential election the authorities presented Archinomics' American construction client with a claim for an additional 20 percent tax. The authorities then complicated the matter by seizing all project records and alleging criminal misconduct on the part of the constructor's on-site American staff. Warned by the U.S. Embassy that this ludicrous tactic was a favorite of the Russian tax authorities, Archinomics quickly transferred the falsely-accused American staff members out of Russia and continued work on the project. However, subsequent frozen local bank accounts and a tax lien against both the owner and the construction site threatened to add the Tver project to that collection of abandoned, unfinished construction projects that dot Russia and the Eastern Bloc. To resolve the issue, Archinomics negotiated another job-site organizational transition. The general contractor contract would be concluded and all job-site and off-site personnel would continue to work on the project under a service contract administered by Archinomics. That agreement allowed Archinomics' American client to collect all as-yet-unrealized project overhead and profit as if the contract had continued through completion. The arrangement also enabled the project to avoid all adverse actions of the Russian tax authorities and continue moving toward completion with key foreign personnel still functioning.
Completing the Project: Despite the combined Russian climatic, cultural, and political perils, Archinomics averaged in excess of $1 million of put-in-place construction per month throughout the project. The owner continued to request changes and the project continued to move toward a September 1, 1996 substantial completion. As the project drew to a close, Archinomics successfully extracted all American equipment and personnel, and the $34 million project has ultimately yielded a $US 2 million profit for Archinomics' American client. In addition, Archinomics recovered 99 percent of all invoiced project costs, including liberal and expansive overhead charges. In short, Archinomics successfully managed the project to the point of minimizing or eliminating risks for its American construction client and achieving a financial profit. The new state-of-the-art headquarters of Tver Universal Bank testifies of Archinomics' ability to achieve international success.
After-ward: In July, 1996 the Russian Central Bank revoked Tver Universal Bank’s charter, for largely political reasons. The Bank’s headquarters’ operation was immediately closed, as were its thirty-seven branches throughout the Russian Federation. The more-than five hundred employees scheduled to move to the new building in September were dismissed from one day to the next. The project was, with all materials and equipment delivered and on-site, suspended thirty days short of opening. Team Archinomics concluded its assignment as stated above, a financial and contractual success for its American client, but short of seeing satisfied Russian bankers, working in a new state-of-the-art headquarters.
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