Value Management  © Daniel Atkinson 1999

Value Management is an approach that brings added value to any type of project that has a degree of complexity or involves different professional disciplines. The techniques involved have made substantial cost savings on construction projects, extensively in US since the 1970's and more recently with great success in UK. The writer has also adopted the techniques in the resolution of international construction disputes by providing the focus and direction for legal and engineering resources investigating issues. This has allowed cost control without jeopardising chances of success.

The Value Management Approach

The Value Management approach requires understanding and experience not only of the technical design and construction process, but also of the legal and cultural/management environment. This applies throughout the design/construction process or for disputes up to the formal hearing in arbitration. Value Management places the emphasis on defining the purpose or function of the project as a whole. Project teams must analyse each element of the project against the defined function. A structured approach is needed with an integrated team.

Each element of the project is identified and ranked using its cost/value ratio and so areas of potential improvement are highlighted. It is not a matter of reducing the quality of the product or the standard of the design or investigation. It is instead finding solutions that match the functional requirements of the project as closely as possible. This is essentially a process of optimizing resources in the widest sense. In construction projects this focussed approach can create savings in the direct cost of materials, in the time for construction, and in the ease of construction. In disputes resolution the approach ensures that the legal team concentrate investigation on those issues with acceptable chances of success and on the evidence central to successful resolution.

Value Management applies to the whole project cycle. It is at the project concept stage that the professional team can most readily achieve the major savings. The professional team can identify the overall functional requirements at this stage and this approach can usefully be part of the overall risk management approach to the project. On construction projects the professional team can decide matters of procurement and particularly when to involve contractors in value engineering examining the buildability of the project. In disputes resolution, the legal team can decide when to involve expert witnesses. It can decide when to interview witnesses of fact on particular issues. It can also decide when to instigate settlement negotiations and how to make the approach.

The Initial Stages

The most critical phase in construction projects is at the 35% design stage. At this stage the participants can more clearly define the detailed functional requirements. At this stage the material specifications, the design parameters and the construction and environment restrictions and assumptions need reassessing. Unfortunately at this stage the project engineers are subject to the greatest pressures on time and fees. The easiest route for engineers is to use standard material specifications and to adopt simple designs and not to consider the impact on the overall project costs. In such a situation the efficiencies of the sub-elements compromise the overall project performance of the project. If the owner has appointed a Value Manager, then it is at this stage that the professional team will again examine the basic assumptions in the developed design. It is important to the success of this approach that the owner appoints a Value Manager who is independent of the project designers. It is equally important that the project designers are involved in the process. This avoids the situation where the project designer feels compelled to defend his initial design. The Value Manager ensures that each design professional realises the impact of his design decisions on the total cost and performance of the project. The owner’s contracts with the designers must therefore provide for such involvement.

In dispute resolution two important milestones arise in the investigation. The first milestone is after the initial legal investigation. This takes the form of continuous brainstorming sessions with key witnesses, the examination of documentary evidence and discussions with senior management to establish the main priorities. The initial investigation may last between one and three weeks. At this stage the initial strategy decided takes into account the availability of evidence including witnesses and establishes the initial budget for the investigation. The second milestone is the first draft of the claim or defence. At this stage a claim value analysis is prepared. It includes an examination of the availability of evidence and the difficulties of proof, and establishes likely betterment of each part of the case with further investigation. It is at this stage that the legal team make decisions as to the most beneficial allocation of resources. At this stage the legal team estimate a settlement range.

The Process

This process of value management, whether in construction or in dispute resolution, is appropriate to complex projects involving several disciplines and experts. Brainstorming sessions allow a facilitator to ensure that each expert or discipline participates in the free ranging examination of options. The style is similar to that adopted when applying risk management techniques. The team should not place too much reliance on past successes. Extrapolation of experience from one project to another does not necessarily provide the stimulus required for innovation. Instead, the team needs critically to examine experience in the light of the changed requirements of the new project. This ensures that in construction projects the engineering design and commercial arrangements, or in dispute resolution the presentation or analysis of evidence, matches the new functional requirements. The emphasis in Value Management is on specifying the functional requirements but this is difficult with little project definition. Redefining the functional requirements is necessary as the project definition develops, since the definition itself brings into focus, through the detail, the choices available. This is very much an iterative process.

The Cost/Worth Model

In construction projects the normal method to identify functions is a value tree analysis in which the professional team divide the project into linked functions. At each succeeding level the function becomes more detailed. The team gives the various functions a value, in order of priority at that level. By multiplying through the tree, the team obtains the ranked value of each detailed function. This provides the necessary basis for understanding the nature of complex projects and is useful in focussing the experts and disciplines. It is most useful at the initial stages of the project. It can help in making the wide ranging decisions such as the form of the structure or its route, and the procurement arrangements. In disputes resolution, the legal team adopts a similar approach but using decision tree analysis. The team by this approach establishes the level of proof required for each legal issue. By examining the likelihood of success at each level the legal team also establish the betterment in monetary terms for different allocation of resources. This is a cost/success ratio model.

Construction projects use a cost/worth model. Understanding the importance of the detailed functions of each element of the project is vital to constructing a cost/worth ratio model of the project design. This takes place at the later stages in the project cycle during detailed design and construction and requires an accurate cost model. Those functions of the element design that are necessary have a value that the professional team can evaluate based on the least cost to provide the function. Those functions that are not needed have no worth. By comparing the cost of the design with its worth the team can construct the cost/worth model. The team can then identify those aspects of the design solution that will yield the greatest potential savings by redesign. This therefore is the focussed approach adopted by value engineering.

Involvement of the Contractor

Considering the total project cycle costs is important including costs of maintenance, repair, replacement and removal at the end of the project life cycle. This means that the team needs to consider when the contractor is to be involved in the Value Management process. Consideration of buildability can introduce significant savings. So for example a designer may choose a concrete section to a cut and cover tunnel that makes for easy concreting. The solution may however involve complex reinforcement or large diameter bars. The professional team needs to know the details of the economics of construction to decide the most cost effective solution. The elimination of cranage associated with large diameter bars may be more cost effective than the ease of construction of the concrete sections. The decision depends upon the function of the reinforcement and the overall function of the cranage. This is a judgment that requires some contribution from the contractor. The importance of this decision will dictate the timing of the involvement of the contractor.

Construction

Significant savings can also be made during the bid and construction stages. This frequently occurs even without Value Management in traditional tendering processes. Contractors submit bids based on alternative designs to those issued for pricing by bidders. Experience shows that the alternatives must be carefully evaluated to assess whether they fulfill the functional requirements of the project. The evaluating team must use the full project cycle costs to determine the potential cost savings and not simply construction costs. Nonetheless contractors frequently satisfy the functional requirements of the project while reducing construction costs. They do so by adopting innovative construction techniques and/or by relying on their existing plant availability or particular construction expertise. In many projects savings are possible because the contractor considers the design and construction in more detail than the original designer. They evaluate material costs and complexity against large savings in production time.

Commercial Arrangements

The appropriate contracting and management arrangements need to be adopted to ensure the contractors help in making savings for the Owner. Matters such as partnering, design and construct and two stage bidding procedures need to be examined with the drafting of appropriate clauses in the construction contract. The essential approach is to create a common goal so that the contractor and the employer have a shared interest in cost savings in the project. The only standard procurement arrangement that has been successful in this respect in the past has been target cost reimbursable forms of contract. This form ensures that the owner and contractor are both concerned to reduce the out-turn cost since each will share in the savings as well as the overrun. Experience has shown that such an arrangement leads to the adoption of Value Management techniques. The Owner’s representative is authorised to examine alternatives such as relaxation of specification, time and overall cost and not simply to apply specifications rigidly. The contractor is encouraged to find innovation in both design and construction and to dialogue with the Owner’s representative.

It is possible to amend standard forms to introduce Value Management techniques. In a recent commission a commonly used standard engineering form of construction contract was amended to incorporate Value Management techniques as part of an overall partnering arrangement. This included establishing a regime for regular open meetings to identify Value Engineering Proposals (VEP). A simplified valuation method for the Contractor’s costs in preparing the design was incorporated based on submitted quotations. The quotation was required to identify the proposed cost savings, proposed time savings, costs for developing the VEP and the changes included in the VEP. The risk of properly assessing the resequencing or disruption of the contractor’s programme was placed with the contractor. The contractor is considered to be best placed to control and evaluate the risk. The benefit he obtains in taking the risk is the share in the possible cost savings to the owner. This was the incentive scheme that created the common goal necessary to make Value Management work. The right commercial arrangements and management approach is vital if the process is to be successful.

Value Management is an approach that must be considered by owners on all projects and is compatible with Risk Management. It can be used on all projects including disputes resolution, but requires an integrated multi-disciplinary team effectively led.