Posted: February 6th, 2015

ENMN332 MANAGERIAL ACCOUNTING 2014-01 OC;Assignment #1 (Individual) ELECTRIE CITY CORPORATION.

ENMN332 MANAGERIAL ACCOUNTING 2014-01 OC;Assignment #1 (Individual) ELECTRIE CITY CORPORATION.

ELECTRIE CITY CORPORATION
Adrián Gómez wrote this case under the supervision of Elizabeth M.A. Grasby solely to provide material for class

discussion. The
authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may

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Version: (A) 2010-04-22
In late December 2007, Andrew Wammes, financial officer and 50 per cent shareholder of Electrie City
Corporation (EC) in Barrie, Ontario, entered a meeting with EC’s project manager to evaluate a bid
proposal for the second phase of a major government contract. It had been seven months since the
company began working on the first phase, and Wammes had to determine how much to bid for the second
project. There would be plenty of competition to win this contract so Wammes knew EC would have to set
a competitive bid price.
THE CONSTRUCTION INDUSTRY
The Canadian construction industry was dominated primarily by a large number of small firms, with over
one-half of all construction employment coming from businesses with 20 or fewer employees. The
industry’s employment grew at an annual rate of 4.5 per cent from 2000 to 2004 to a total of 953,000
workers, at which time over one-third of all construction jobs were in Ontario. By 2006, the construction
industry represented more than six per cent of all jobs in Ontario,1 amounting to a total of 384,785
employed laborers.2
Interest rates determined, to a certain extent, the cost of lending, which in turn influenced the level of
active property development. The prime interest rate in Canada had fluctuated over the past few years and
was 6.25 per cent by the end of 2007 (see Exhibit 1). Furthermore, in 2006, the value of residential
permits experienced an annual increase of nine per cent (see Exhibit 2),3 while investment in the
construction of non-residential buildings increased by 12 per cent to a total of $35.5 billion.4 In the
electrical contracting industry, the largest commodities employed were steel and copper. The prices of
these goods had also been fluctuating (see Exhibit 3).
1
www.ontario.ca/ontprodconsume/groups/content/@gopsp/@lmi/documents/document/158165.pdf, January 20, 2010.
Ibid.
3
Ibid.
4
www41.statcan.ca/2007/2162/ceb2162_000-eng.htm, January 20, 2010.
2
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Many steps were involved in the construction of a building, such as its architectural design, building the
walls and the foundation, laying out the electrical wiring, plumbing, etc. Since each component differed
from the other and all building components had to be co-ordinated, many construction clients hired general
contractors5 to manage construction projects. Construction projects required that the different professions
communicate and co-operate since construction sites could easily get crowded during certain building
periods. Some construction had to be performed by specialized contractors, such as mechanical
contractors, who installed heating and cooling systems (among other responsibilities), and electrical
contractors, who installed the wiring and lighting in a building.
ELECTRICAL CONTRACTING IN ONTARIO
To become a certified electrician, individuals had to have an electrical contractor sponsor them in a
program that involved a combination of work experience and in-school training, including attendance at
three training sessions within a five-year apprenticeship program. After 9,000 hours of apprenticeship,
individuals had to pass the Certificate of Qualification (C of Q) exam, administered by the Ministry of
Training, Colleges and Universities of Ontario, to earn the electrician designation.
In addition to installing the wiring and lighting of a business, electricians were in charge of setting up the
distribution of electricity, voice and data information systems in buildings and houses. Through the
installation of electrical panels and other methods, electricians linked buildings to the main power grid and
to the main telephone or data wires, which were run by separate entities.
To begin an electrical installation project, electricians had to obtain a permit from the Electrical Safety
Authority (ESA).6 Likewise, when the project was completed, the electrical installation would be
inspected by the ESA. If the work was completed in accordance with the Ontario Electrical Safety Code
(OESC), the contracted electrician would be issued a Certificate of Inspection. This certificate verified that
the electrical installation had been properly completed. In addition, there existed several associations that
electricians could join. One such organization was the National Electrical Code Association (NECA).
Among its other activities, NECA published guidelines on how to determine pricing for standard elements
on projects that were used by some electrical contractors as well as their clients.
General contractors could either hire specific electrical contractors or set up a Request for Proposal (RFP)
for the project. When a project was more expensive, electrical contractors would generally have to submit
their bid via the RFP in order to have an opportunity to win the contract. The RFP process required
electrical contractors to evaluate the time and materials needed to complete a project and to propose their
charge (the bid) for the work. The builder then compared different proposals and selected one electrical
contractor to do the electrical installations. Consequently, electrical contractors (who employed
electricians) faced intense competition when bidding for non-residential construction projects.
To set a job’s price, electrical contractors would meet at the client’s worksite and inspect the construction
area. Construction blueprints (see a sample of a blueprint in Exhibit 4) for a project included all the
specific requirements of a construction project, from where to include lighting to where to install electrical
and data outlets; these blueprints also included additional notes to better clarify exactly what was required.
5
General contractors were hired to oversee the construction of a project from start to finish. They would be in charge of
setting deadlines and contacting different contractors to finish the construction of a residential or non-residential

project.
6
“ESA is a stand-alone financially self-sustaining not-for-profit corporation accountable to a board of directors and

operating
as an administrative authority under the Electricity Act 1998”, www.esasafe.com/Corporate/abt_001.php?s=0, January 20,
2010.
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The more detailed a blueprint, the better understood the instructions and requirements would be for the
contract, which helped contractors’ to properly price a bid on an RFP. Given the competitive nature of the
RFP bidding process, companies tended to offer a lower bid on the RFP since it was common industry
practice to make much higher margins on any adjustments to the project after the bid was assigned. These
adjustments, referred to as Change Notices (CN), resulted from changes to the original blueprints due to
client preferences or complications with the job.7
ELECTRIE CITY CORPORATION
EC, in operation since 1990, earned over $10 million in revenue in 2006, with a profit close to $470,000.
With more than 50 employees, EC was involved in residential as well as non-residential construction work
in the Greater Toronto Area. The company was non-unionized, employing many certified electricians and
several apprentices on a regular basis. In addition, EC employed foremen to take charge at the
construction sites and project managers who supervised the work of foremen.
Wammes believed in providing positive experiences for EC’s customers and in building sound
relationships with its clients. EC used these criteria to promote and hire only the most capable electricians
available, rewarding them generously for their efforts. “You’re only as good as the last job you did for
someone,” claimed Wammes, which is why one of the co-owners of EC was specifically in charge of
overseeing project managers and co-ordinating EC employees.
Wammes believed that open
communication with employees was very important. A starting electrician earned $30 an hour at EC.
Hourly rates increased the longer electricians stayed with the company. When electricians were not
needed, EC adjusted the size of its workforce accordingly. Wammes believed strongly in promoting from
within; consequently, as electricians proved themselves, they could be promoted to foremen and eventually
to project managers.
As one of two 50 per cent shareholders, Wammes managed EC’s finances and client relations. He was
convinced that the success of EC was partly due to the company’s focus on customer satisfaction. When
construction contractors had smaller projects to complete, they often turned to EC’s high quality of work
and proven track record. For this reason, Wammes made sure that the contractors were not charged more
than a 35 per cent markup on cost for projects under $25,000, with the goal of keeping clients satisfied
with the quality and cost of EC’s work so that contractors would hire EC for future construction jobs.
Projects under $25,000 represented approximately 25 per cent of EC’s total revenues.
EC’s remaining 75 per cent of revenues were generated from large RFPs. Although the company’s
relationships and track record were important, general contractors primarily awarded these larger contracts
based on the bid. These large electrical contracts tended to be non-residential and required a significant
investment of time and resources before EC could submit its bid. The contracts had high revenue potential
yet were difficult to win. Estimating the cost for large projects and determining the bid price was a
difficult and risky process. Once a bid was awarded, the electrical contractor was required to perform the
work at the agreed-upon price for the project’s duration.
The municipal, provincial and federal governments were significant providers of construction jobs, yet
winning a government contract was more complicated. Before being allowed to place a bid on a
government contract, an electrical contractor had to prepare a Contractors’ Qualification Statement (CQS).
The CQS required companies to provide financial references, their track record of previous construction
7
Sometimes clients did not foresee complications with a project until after the bid was awarded and the electrician had
access to the inside of a building’s structure to see how the wiring actually needed to be done.
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jobs, and data on their previous yearly sales, among other information, to ensure that the contractor had the
capacity to perform and complete the work without experiencing significant financial duress. This
document guaranteed to the government that the contractor could handle an RFP project without incurring
the risk of bankruptcy and thus being unable to finish the construction job.
THE LONDON COURTHOUSE
Phase 1
The London Courthouse, located at 80 Dundas Street, London, Ontario, housed the Superior Court of
Justice and the Ontario Court of Justice for Middlesex County. This courthouse had many departments,
including a small claims court, civil filing (for lawsuits over $10,000), family court, a criminal court and a
justice of the peace.8 The London Courthouse was an old building that was in need of some renovations;
consequently, in 2005, the Ontario Realty Corporation (ORC) issued a Request for Proposals for
construction work at this location, representing the first phase of a major renovation of the London
Courthouse. The ORC reported to the Ontario Ministry of Energy and Infrastructure, which managed
Ontario’s public service real estate portfolio. With a goal to “optimize the value of the government’s real
estate portfolio and provide cost-effective solutions for public service accommodation,”9 the ministry
managed construction projects on behalf of the government.
In June 2006, EC bid and was awarded the contract for a project to perform some electrical renovation
work in the London Courthouse. As of December 2007, EC had completed about three-quarters of the
contract and had earned over $180,000 in profits despite the project having taken longer than expected due
to some issues that arose with other contractors.
Phase 2
In December 2007, EC had an opportunity to bid on another RFP for work at the Courthouse. This second
phase included renovation to some of the courtrooms and other areas. Security in the courts was necessary
at all times, which tended to complicate the construction process. The general contractor had been pleased
with EC’s work to date, and Wammes believed EC’s experience with the Courthouse’s first phase would
be beneficial when bidding on the second phase. Wammes estimated that the second phase would take
approximately three years to complete.
At EC, project managers were in charge of evaluating RFPs. After a project manager determined an
estimate, a meeting with one or both of the owners would ensue to discuss the proposed offer. EC
currently employed six project managers, each of whom earned a different salary depending on their
experience and the quality of their work. Due to the large revenue potential that Phase 2 represented, the
owners assigned a highly experienced project manager, Kevin Pawlak to evaluate the RFP. Pawlak earned
$100,000 annually and spent approximately 40 per cent of his time (not including the time to evaluate bids)
managing the current Courthouse construction project. After reviewing the blueprints and the work
requirements, Pawlak believed that EC could bid $830,000 and be successful. Furthermore, he believed
that EC could generate an additional 25 per cent above this price from change notices during the
construction process. Historically, 20 per cent of EC’s total project revenues were earned from change
notices, although this percentage could be as high as 25 per cent, depending on the specifics of the work.
Moreover, Pawlak estimated that the company would spend approximately 25 per cent of its expected
revenues on materials purchases. This figure included the cost of materials plus eight per cent provincial
8
9
info.london.on.ca/details.asp?id=1665, January 20, 2010.
www.ontariorealty.ca/site3.aspx, January 20, 2010.
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sales tax charges. EC paid all its suppliers and subcontractors within two months of the purchase or work
performed. EC ordered most of its construction supplies on a need-only basis; however, there were some
common supplies that were used widely. These supplies accounted for approximately one-fourth of the
value of materials purchases. EC purchased common supplies in bulk approximately every 10 days, which
lowered purchasing costs.
Sometimes, EC’s electricians could not perform all the work required. In these instances, EC hired other
companies to perform some work for projects. For example, to install security and fire alarms, EC had to
hire a specialist in the field to set up the system. For Phase 2, Pawlak had contacted several
subcontractors10 for quotes on specified items. EC would have to hire a company that specialized in sound
equipment to install audio visual equipment, court recording equipment, microphones, monitors and
speakers in the courtrooms for a total cost of $129,000. Four other companies that did specialized work
would also need to be hired for an estimated cost of $27,300.
Pawlak had estimated that Phase 2 would require a total of 8,200 man hours if EC employed four workers
for the project: a foreman, two electricians and an apprentice. All were expected to work the same number
of hours to complete the project. There was an apprentice available to work on the bid who was currently
in his fourth apprenticeship year. At EC, apprentices earned 40 per cent of an electrician’s hourly wage in
the first year of their apprenticeship with that wage increasing by 10 per cent for every apprenticeship year
they had completed. They were paid full wages after getting certified. Pawlak knew that it was imperative
to assign a skilled foreman to manage such a large job and EC had a foreman appropriate for the job who
was paid an hourly wage of $35. EC also paid an additional 10.8 per cent on all wages paid to its
employees towards employee benefits, such as Unemployment Insurance, Canada Pensions Plan, Workers’
Compensation and health insurance. At the end of each year, Wammes generally paid bonuses to EC’s
employees, depending on individual and company performance, equal to 10 per cent of all wages paid. EC
also paid for its employees’ vehicle parking expenses, which Pawlak estimated, after reviewing the
information for the first phase, would amount to $3,060.
The government generally paid contractors every 90 days; however, there had been occasions when it had
taken up to 120 days to pay its bills. Government contracts also exercised holdbacks: the ORC withheld
10 per cent of all payments for government work until the project was completed. The holdback funds
would not be released until the construction project was completed to the client’s satisfaction, thus,
guaranteeing the government that the work was properly completed. To complete the Phase 2 project to
the client’s satisfaction, EC would need to acquire licensing from the ESA that would allow EC to begin
construction, pay for an inspection and obtain a certificate of completion at the end of the project. The cost
of licensing this project was estimated at $472.
Finalizing the Bid Proposal
The RFP was due in two hours, and Pawlak had just finished presenting the project details along with his
recommendations to EC’s two owners. Wammes and his co-owner now had to agree on an appropriate bid.
Wammes was considering whether he should discount the bid price and, if so, by how much. EC had
experience with the first phase of the project and already knew the building well. Wammes wanted to
determine a winning pricing strategy to ensure that his company continued working at the London
Courthouse.
10
A subcontractor was a company hired by another contracted builder (other than the general contractor) to perform a
specific aspect of a job that said builder was unable to perform.
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Exhibit 1
PRIME INTEREST RATES
As of
March
June
2001
2002
2003
2004
2005
2006
2007
6.75
3.75
4.75
4
4.25
5.5
6
6.25
4.25
5
3.75
4.25
6
6
Low
Average
High
September
December
5.25
4.5
4.5
4
4.5
6
6.25
August 2004
January 2001 to December 2007
February 2001
4
4.5
4.5
4.25
5
6
3.75
5.01
7.25
Source: Bank of Canada, adjusted to reflect the required trimesters.
Exhibit 2
VALUE OF NON-RESIDENTIAL BUILDING PERMITS BY PROVINCE
Source: www41.statcan.ca/2007/2162/grafx/htm/ceb2162_000_1-eng.htm, January 20, 2010.
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Exhibit 3
STEEL AND COPPER WORLD PRICES BY QUARTERS
REFINED COPPER (CENTS/LB)
As of
Quarter 1
Quarter 2
Quarter 3
Quarter 4
2001
80
75
67
64
2002
71
73
69
69
2003
75
74
79
93
2004
124
126
128
140
2005
148
154
170
195
2006
224
329
348
322
2007
269
346
345
STEEL ($/TONNE)
As of
Quarter 1
Quarter 2
Quarter 3
Quarter 4
2001
215
208
200
200
2002
200
253
277
295
2003
315
298
280
298
2004
408
513
578
637
2005
585
527
453
452
2006
457
600
607
560
2007
530
562
567
Source: The Economist Intelligence Unit “WorldData –– Quarterly Time Series.”
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Exhibit 4
SAMPLE BLUEPRINT
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Source: Company files.
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Exhibit 4 (continued)
Source: Company files.
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Introduction
The intent of this assignment is to provide an opportunity for individuals to work on
a case combining the financial accounting knowledge from ENMN 324 with an
examination of a managerial situation. The case, Electrie City Corporation, is
based on an actual situation that occurred. The link to the case can be found in
Readings & Resources under Outline on the Moodle course site. The case has
been specifically chosen due to its links to entrepreneurial issues and problem
solving in the areas such as relevant costs, sensitivity analysis, breakeven,
return on investment and payback.
Required
Review the Electrie City Corporation case and the following questions and
prepare your response in an excel document. Please include a cover page with
your name, your instructor’s name and the name and number of the course
(ENMN 332). Your response to each of the required MUST be included on a
separate worksheet tab and each tab should be named Q1; Q2; and so on.
Anything beyond the five questions, or not named as such, will not be marked.
In addition to financial information outlined on pages 4 and 5 of the case, assume
that Electrie City Corporation was required to pay $15,000 in 2005 in order to
register for and gain access to the bid site for The London Courthouse. Also, if it
is successful in winning the bid on Phase 2, it would need to purchase a new
piece of equipment which would cost $120,000.
For this course, ignore working capital investments related to accounts receivable,
accounts payable and inventory. You will have more on this when you move into
your finance course.
NOTE: While the project will take three years to complete, the total labour time
involved would be the equivalent of one year. Assume that a fourth year
apprentice would be available at a fourth year rate during the term of the project.
To get annual net operating cash flows, calculate the full project net operating
cash flow and divide by three.
1. Perform a qualitative analysis of the corporate capabilities of Electrie
Corporation and identify the main reasons why you believe it would or
would not be successful on the bid. Also consider any risks or
advantages that Electrie may face in making the bid. (15 marks)
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2. Identify at least five factors that Ontario Realty Corporation would
consider in assessing the bid process and explain why. (10 marks)
3. Identify all amounts relevant to this venture. Categorize these amounts
as fixed, variable and one time investment. (10 marks)
4. Prepare two incremental analyses showing the net annual operating
cash flows for the bid assuming high change notice revenue and low
change notice revenue. Calculate the annual return on investment and
payback for both scenarios. (30 marks)
5. Calculate the minimum bid price that would be required to break even
under both the high and low change notice scenarios. Show your proof.
(15 marks)
6. As Wammes and his co-owner, what bid price would you submit, and
why? Discuss both quantitatively and qualitatively. (20 marks)
Please note the weightings for each question and prepare your responses
accordingly.
will be looking for clear, logical and well-written responses and recommendations.
Assignment grading will reflect overall presentation, completeness of content,
evidence of individual critical thinking, based on the Learning Domains being
evaluated for this assignment as noted in the course schedule. The descriptions of
these can be found in Learning Outcomes in the Course Overview.
If you have any questions regarding the assignment, the wording in the case or
any other aspect, please contact your instructor.
Page 2 of 2

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