THE WELCH COMPANY
440 Davis Court #1602
San Francisco, CA 94111-2496
415 781 5700

[Submitted via Internet]

October 15, 1997                                          03 00050 97101501



Mr. Denis Henmi
Executive Vice President
Kwan Henmi
Architecture, Planning, Inc.
74 New Montgomery Street #300
San Francisco, CA  94105

Subject:  Communication Metrics Cost Savings
                 U.S. Army Corps of Engineers Report Oct 7, 1997

Ref:   a. Welch letter to Denis Sep 22, 1997
          b. Welch letter to Denis Sep 4, 1997

Dear Denis,

This has two components:

* Cost Avoidance is speculative but substantial

The contractor has filed $65M in claims, and may be
entitled to some increased payment but has not yet
substantiated the amount. Litigation will establish
the amount owed, either by settlement or judgement.
The record of performance is a key factor in the
litigation process, but not the only factor.
Therefore, the record prepared under Communication
Metrics contributes to cost avoidance, but the impact
is speculative.

* Cost Reduction reduces level of effort to accomplish
the same or increased work, i.e., better productivity

a. Cost Avoidance (Savings)

Navy Sewer Line
---------------
Marc McGovern, Construction Manager on Oakland, reported
Communication Metrics identified a solution to the Navy
Sewer Line problem, ref d Appendix A. Over many months
the Contractor demanded a change order for alleged
defects in contract drawings. At the Progress Meeting on
October 15, 1996, the contractor submitted a proposal:

Extra Cost to stabilize slope per Dwgs. $373K

Analysis showed a possible basis for a changed condition,
but Communication Metrics discovered alignment in the
underlying record, which had been overlooked, that
eliminated this cost. The solution enabled the contractor
to realize improved earnings at no increase in cost to
the Corps of Engineers.


Soft to Hard Change in Material
-------------------------------
From approximately October 1995 to March 1996 the
contractor filed notices of encountering hard material at
locations where the drawings showed soft material. A
series of 5 RFPs were issued by the Resident Engineer.

The contractor responded to all RFPs at once on 960730,
seeking a total of approximately $7M extra payment.

The Corps maintained the contractor bid the same unit
price to dredge areas shown as "hard" as it bid to dredge
areas shown as "soft," and so requested justification
from the Contractor for an increased unit price.

A major source of communication arose over the form of
the original RFPs which requested a lump sum price for
work that was bid as unit price. The form of the language
became so embroiled as to cause the cost-sharing sponsor
to argue on behalf of the contractor's cost request,
despite the fact that the cost-sharing sponsor regularly
voiced opposition to the contractor's claim.

Communication Metrics was begun in September 1996.
Within a month or so it was applied to the Soft to Hard
Polygon claim.

Analysis showed:

1. Mathematical and contractual errors in the
contractor's submission.

2. Lack of alignment between the record of samples
taken in the field that spawned the RFPs, and the
sweeping scope of the RFPs which converted an
entire area from soft to hard, rather than merely
acknowledge that an area may contain some harder
material for which justification was needed to
support increasing the unit price bid for
comparable work.

3. Support for the Corps of Engineer's position that
no increase in payment was warranted.

4. A strategic adjustment was needed to withdraw the
5 original RFPs and combine them into a single RFP
with an express requirement to submit a unit
price.

This strategy transcended endless argument with
the contractor about application of FAR
regulations to the contractor's lump sum cost
proposals for the original RFPs.

As a consequence RFP #19 was issued in accordance
with point 4 that focused analysis on justification
of unit price increases relative to original bid
pricing.

Total savings is approximately $7M. We will estimate
savings due to the contribution of Communication
Metrics as:

= $1M


Todd/Schnitzer Wing Contaminated Materials Claim
------------------------------------------------
The contractor encountered underwater debris in an area
of the work. Communication Metrics aligned the record of
conditions found in the field with the notice by the
contractor and with contract provisions. This supported
a determination that a changed condition existed. An RFP
was crafted to enable the work to proceed.

The contractor refused to perform the RFP claiming later
events established that contaminated materials existed in
the Todd/Schnitzer wings which required special handling.
Due to a mix-up from not applying Communication Metrics
RFP #20 was rescinded by the District, relieving the
contractor from a direction to perform the work.
Eventually, the contractor claimed $15M in extra payment
was needed to perform debris removal estimated by the
government to cost approximately $500K. Communication
Metrics tracked conflicting promises and unsubstantiated
contentions by the contractor that it had commissioned
tests proving contamination. Since this matter remains
open, for purposes of this estimate the savings
attributable to Communication Metrics is approximately:

= $2M


b. Cost Reduction (Savings) on Construction Management

Navy Sewer Line
---------------
The Corps of Engineers avoided expending approximately
160 hours (4 weeks work) in administering this matter as
a result of using Communication Metrics for research,
organization and analysis that revealed a win/win outcome
for the Corps and the Contractor. It is estimated that
at least another 40 hours would have been expended by the
Corps but for the solution by Communication Metrics.

200 hours at $150/Hr = $30K


Soft to Hard Change in Material
-------------------------------
Approximately 160 hours of Construction Management was
saved by Communication Metrics work product that yielded
the strategy of combining RFPs which completely changed
the level of effort required to administer this claim.

150 x $150 = $23K


Todd/Schnitzer Wing Contaminated Materials Claim
------------------------------------------------
Approximately 250 hours was saved by expediting review
among affected District and Project staff and formulating
analysis to issue RFP #19, and further by providing
information from the record to support understanding of
complex environmental issues.

250 x $150 = $38K


Other Issues (Mud Bucket, Weekly Planning, Schedule)
----------------------------------------------------
During the short period Communication Metrics was used,
it revealed the contractor was not performing critical
contract requirements. Problems that were being worked
by Corps of Engineers staff were shown to be contractor
responsibilities. A prominent example was a meeting on
December 13, 1996. The contractor presented an updated
schedule with voluminous "backup." Welch did not attend
this meeting, but through interviews and documents
Communication Metrics discovered the contractor gave
incorrect and incomplete information at the meeting that
initially misled the District on a critical project
decision.

For this order of magnitude estimate, rather than explain
every matter, we estimate savings as follows:

10 issues x 20 hours per issue

200 x $150 = $30K


Progress Meetings Improved by Reduced Attendance
------------------------------------------------
As a result of contractor difficulties leading to major
claims by the Contractor, the Corps of Engineers began
staffing weekly Progress Meetings with 10 to 15 people
from Engineering, Contracting, Construction,
Environmental, etc.

This attendance posture was intended to improve
"communication" among affected staff whose work may have
been impacted by various issues. It may have been
intended to demonstrate heightened scrutiny and concern
by the Corps of Engineers in improving performance by the
Contractor.


Communication Metrics demonstrated this level of
attendance was unnecessary. Better understanding was
achieved through the meeting notes, and it was maintained
through the record, rather than become distorted by
constant recall from each attendee. Follow up was more
rigorous and effective using the Action Item system
endemic to SDS that supports Communication Metrics. As a
result Chief Con Ops was able to order attendance
restricted to RE, PE and the Communication Manager. The
PM attended on occasion, however, as Herb Cheong's memo
states, research prior to meetings and post meeting
briefings by the Communication Manager ensured more
thorough and productive meetings, ref d Appendix A.

A conservative estimate of cost savings assumes avoid 5
people for 1.5 hours per meeting for the 2 year duration
of the job.

5 x 1.5 x 52 x 2 = 780 hours x $150 = $117K

The more important contribution of Communication Metrics
is making meetings productive, as discussed below under
re-work.


Preparation/Research Staff Time Reduced
---------------------------------------
Communication Metrics is a dedicated "intelligence" role
that uses technology to organize information and provide
timely analysis for decision support. When there is not
enough time to add intelligence to information, "rework"
results, as discussed below.

On Oakland, Communication Metrics reduced the time
required for Corps of Engineers staff to prepare for
meetings, as reported by Herb Cheong, our Project Manager
(see ref D Appendix A).

Welch spent from 15 minutes to an hour to prepare for
these meetings, then briefed Corps of Engineers' managers
who might be leading a meeting, or otherwise need to be
aware of key information to be developed at a meeting.
The level of preparation would not be possible to perform
by conventional means in even 2 hours, so we use 1 hour
of saved time per attendee, since all attendees do not
need the same amount of preparation at each meeting.

For simplicity, 1 hour of time saved is estimated for all
attendees, even though some were Contractor and Port of
Oakland staff. This reflects the general point that
preparation and research benefits everyone, advancing
partnering objectives; and further that this practice was
actually performed more broadly on a daily basis, rather
than just for weekly progress meetings.

SDS diagnostics for Weekly Progress Meetings under
"Rework" below, shows a total of 177 attendees for 15
meetings over 3 months. This yields for 3 months:

177 x 1 x $150 = $26K

Total savings on project for 2 year job.

3 x 4 x 2 x 26 = $312K

The benefit of this investment to be prepared is seen from
the avoided cost of rework.


Rework Reduced
--------------
Authorities recognize "rework" is a major source of cost
growth. The U.S. Air Force Institute of Technology
(AFIT) reported a direct correlation between cost growth
and the rate of entropy in the information base (see
"Uncertainty Analysis for Program Management" published
by PMI, 1981). Rework is attributed in case studies and
management theory to failure to "prioritize." Information
overload (entropy) reduces visibility of priority due to
limited span of attention.

The more common description of "rework" is "problem
handling" through trial and error. Costs of rework are
absorbed as increased management (overhead) costs due to
"Murphy's Law;" or, litigation results in cost avoidance
or cost escalation. In either case, budgets and earnings
suffer.

This estimate for rework looks only at costs that are
absorbed. Litigation expense is considered separately.

<2622 "Rework" arises from inability to attain closure on
issues due to conflicts between decisions and reality
that leak out through trial and error over weeks and
months. Actions are taken that seem correct at the
moment, but then suffer continual corrections over time
due to lack of alignment with controlling factors, e.g.,
facts of performance and conditions, prior commitments,
contract provisions, policies, procedures, guidelines,
regulations and laws. Meetings, calls and email increase,
but understanding and progress decline. Communication
worsens as new players come on the scene and original
objectives are forgotten leading to information entropy.

Limited span of attention, inherent to human mental
acuity, prevents alignment except through trial and
error, called rework. Span of attention is similar to
span of control (or "management") where increasing the
number of people to lead has diminishing returns due to
increased complexity of communication. Increasing
information beyond human limits causes critical factors
to fall outside the span of attention until problems
gives visibility of need for corrections, i.e., rework.

"Feel Good" management causes rework when decisions seem
correct, or good enough at the moment, based on subjects
(also "issues," "factors") within the span of attention.
Managers feel the time and cost to obtain information,
organize and analyse it to generate "intelligence," is
greater than the future cost of rework. Complaints that
managers "...do not have time to think," reflect costly,
new realities that information overload reduces time to
think about all of the subjects that materially impact
the work. Deferred "pain" of future adjustments (rework)
is therefore traded for immediate relief that "feels
good." However, stress, acrimony and confrontation rise
as misunderstanding, cost and schedules grow. Posturing
and belligerence permeate communication. Nobody feels
good when rework causes cost growth and project failure,
due to the insidious impact of information entropy under
limited span of attention.

Communication Metrics reduces rework by expanding the
span of attention in two ways:

1. Proactively aligns understandings, and therefore
decisions and actions with a broader spectrum of
controlling subjects, including authority, than is
possible by conventional means.

Alignment avoids the steady drip, drip of new and
unforeseen correlations, as decisions gradually
encounter the ultimate metric of reality that
prevents closure under conventional practice of
trial and error "Feel Good" management. SDS
technology under Communication Metrics empowers
discovery of correlations (i.e., intelligence)
that are otherwise hidden by the limited span of
attention. The result is proactive management
that saves the cost of trial and error rework.

Communication Metrics provides two types of
alignment that support organization and analysis
to produce useful "business intelligence":


a. Subjects

These are categories or classifications of
information, matters and issues requiring
common treatment. Examples are meeting
agendas, file descriptions, groupings of
documents on a desk according to common
meaning, application etc.

b. Links (Citations, References)

These are related events, documents,
analysis, and controlling authorities,
called "original sources," that produce a
web of connected "knowledge" about cause
and effect that does not decay over time.

2. Maintains visibility of priorities by linking
scheduled work to original reasoning and factual
history. Action Items are not forgotten by passage
of time, constant information, nor by new tasks
and new players. The correlation (integration)
between time and information (schedule, diary)
overcomes the growing risk of complexity in the
business environment due to information overload
that exceeds span of attention.

On Oakland, there are approximately 11 key players:

Hrs/Week
Planned Actual

Project Engineer 40 45
Inspector Supervisors 80 90
Inspectors AE 240 250
Resident Engineer 5 20
Construction Manager 10 22
Chief Construction Operations 2 6
Asst. Chief Con Ops 4 15
Project Manager 5 12
Design Engineer 5 10
Chief Planning/Engineering 2 5
Contract Officer 3 10
Contract Specialist 2 5
Environmental Engineer 2 5
----- -----
Total hours per week................. 396 495

Actual time to manage the work is 25% above budgeted
time, but for District staff the investment is 200% -
300% greater which causes significant reduced attention
to other matters, snow-balling reduced effectiveness on
everything. This condition which is a growing phenomenon
in the business environment leads to reduced preparation,
cursory treatment and over reliance on conversation,
called "guess and gossip" in the District's Communication
Metrics report, ref d.

The amount of time lost due to rework can be calculated
from the difference between the typical agenda prepared
for meetings which reflects subjects that are recognized
as material to performance, and the actual number of
subjects tracked by Communication Metrics. A second
factor is the number of links (citations) that align
understandings in the record, since this represents the
potential for conflicts that require correction.

The agenda prepared by the Corps for the Oct 1, 1996
Progress Meeting had 10 items. This is a typical agenda
for weekly progress meetings. Most meetings average from
6 - 12 subjects.

Communication Metrics actually tracked the following
factors at weekly progress meetings:

SDS Diagnostics Progress Meetings
---------------------------------
Partici- Sub- Cita- Action
Date Time pants Words jects tions Items

961001 1000 19 1125 40 10 7
961009 1300 19 1861 47 29 9
961015 1000 15 2193 61 32 7
961022 1000 21 2974 57 24 7
961029 1000 15 2898 60 44 12
961105 1000 14 3671 65 36 11
961112 1000 14 4553 56 91 16
961119 1000 13 4377 48 93 4
961126 1000 12 2811 39 59 11
961203 1000 11 1416 27 30 2
961209 1330 4 3162 31 69 14
961219 1000 4 2521 28 48 9
961230 1330 4 1956 32 37 6
970106 1200 6 2626 6 32 15
970106 1400 6 1753 22 27 6
----- ----- ----- ----
177 619 661 136

Since, as noted, common practice identifies about 10
subjects per meeting, then for these 15 meetings, a total
of 150 subjects would have been worked.

Communication Metrics identified 619 or 469 more subjects
for these particular meetings.

This reflects added value of proactive management to
identify correlations and implications that avoided
rework on 469 subjects which would otherwise have been
discovered by trial and error problem handling over weeks
and months. Increasing from 150 to 619 subjects is a
significant increase in management span of attention
uniquely possible under Communication Metrics.

Citations should be added to this amount because they
reflect alignment which is impossible under conventional
management due to limited span of attention, and so
otherwise leads directly to rework.

Additional Subjects 469
Citations (alignment) 661
-----
1130

Note: this is a conservative valuation since it
ignores the difference between the number of
action items people are able to recognize and
those tracked by Communication Metrics. It is
likely in the range of 2:1 or 3:1. The analysis
also ignores additional subjects and linkages
tracked by Communication Metrics from other
meetings, discussions, calls and documents,
including email. In less formal communications,
people generally recognize 2 or 3 subjects and a
similar number of action items. Like formal
events, no one has time to link understandings
from less formal communications to original
sources. These factors increase the potential of
Communication Metrics to save the cost of rework
by overcoming limits on span of attention.

Assume each missed alignment results in one (1) hour of
rework by a Corps of Engineer manager. Therefore,
Communication Metrics produced savings of:

1130 x 1 x $150 = $170K

Total savings on project for 2 year job.

3 x 4 x 2 x 170 - 170 = $3,910

Assume normal bell curve and that period when
Communication Metrics was applied was at or near peak
activity on the project, so that actual savings is only
25% of peak rate.

.25 x 3910 = $978K

Where was this money expended by the Corps?

Average savings per week over 3 months

$170/12 = $14K

The weekly savings from Communication Metrics correlates
with increased expense for Corps of Engineers' District
staff who were forced into performing "problem handling"
that escalated into a constant daily grind of putting out
fires that developed on Oakland.

Planned - Actual operations hours is 495 - 396 = 99

99 x $150 = $15K

A major advantage of Communication Metrics, in addition
to avoiding increased District staff time, so it can
perform normal duties, is that Communication Metrics
produces a record that is constant. It can be used
repeatedly without decay of understandings due to time,
and distortion of reality when "too many cooks" get
embroiled in the "kitchen." This avoids the problem of
congestion, and produces a record that supports dispute
resolution, including litigation, if necessary.


Litigation
----------
Jim Stout, former member of District counsel staff, who
specialized in contracts, examined Communication Metrics
work product on the Oakland Harbor project. In a meeting
on October 15, 1996, Jim advised the Contracting Officer,
Tom Benero, that the methodology of providing context and
alignment with requirements and prior events and
commitments is helpful to the District, and should be
continued for the duration of the Oakland project to
assist in resolving disputes.

Communication Metrics was ended OA December 31, 1996.

The Contractor filed for Chapter 11 Bankruptcy at about
the same time. Contractor claims have since been filed
in a total amount of about $65M. District counsel have
requested support from Communication Metrics for the
reasons cited by Jim Stout, who has since retired.

Communication Metrics is intended to avoid disputes and
litigation by using concurrent discovery to accomplish
win/win results for the Corps of Engineers and for the
Contractor, as was done on the Navy Sewer Line matter.
Such outcomes advance our partnering policy objectives,
and our project management goals for cost reduction.

Of course situations arise, where, for example, a
contractor in severe financial difficulty may find it
useful to present unfounded claims in hopes of salvaging
its existence. This observation makes no reference to the
Dutra situation per se. As well, legitimate differences
in the application of contract provisions and the law may
require determination by a neutral and this is essential
to a vital procurement program.

Where litigation cannot be avoided, the record produced
by Communication Metrics is essentially court-room ready
evidence. This saves the Corps of Engineers significant
legal expense, as found by Jim Stout.

Currently, the District has two full time lawyers working
on the Oakland project, and approximately 6 claims
management staff. I estimate that Communication Metrics
would, if used for Construction Management, expensed para
3c, permit reduction of one-half lawyer and 2 claims
management staff. Assuming this savings accrues for 10
months, which seems likely based on current progress, the
total savings would be;

2.5 x 40 x 52 x 10/12 x $150 = $650K

Saving $650K of direct expense is of course not the big
prize. The interest of the Corps is to ensure that it
avoids paying more than is equitable to the contractor.
We have identified above some specific issues claimed by
the contractor which appear at this time will result in
cost avoidance, or savings, of approximately $3M
attributable directly to Communication Metrics. This
savings comes at a cost of $50K which produced other
benefits and direct savings, as shown in para 3b, above.
Since Contractor's claims have escalated, Communication
Metrics should realize a much larger savings, or cost
avoidance, if applied for litigation support of current
exposure. The amount is not clear enough at this time to
form a judgement and so renders any such projection too
speculative for evaluating Communication Metrics.