This is a familiar statement in design and construction – “Every time we are asked to do “Value Engineering” it was to lower the cost!”
VE is a process to find ways to reduce costs and improve performance, but is often mistaken solely for cost savings. In construction, Value Engineering is applied to eliminate or re-engineer design and construction features that add cost but not value.
VE is typically measured as improved quality, functionality, lifecycle, utility and appearance. Design concepts, specifications, construction techniques, materials, building systems, building types, and upfront versus lifecycle costs are analyzed to achieve the best value for the owner.
A VE session without a Life Cycle Cost Analysis (LCCA) is just a self-serving cost slashing and really is short-sighted. LCCA reviews a building system and its maintenance in today’s dollars over a longer period of time and identifies the cost impact as well. This is the fundamental reasoning behind the LEED process we prominently now use which reflect prudent design.
Quality architects, engineers and construction firms found when the LEED process was applied to projects already designed and built that they in turn met Silver and Gold ratings without extreme means of mechanical system upgrades to do so. The features and benefits of various alternate designs and materials should also be reviewed for their local market effect, i.e. rent ability, rent rates, tenant attraction/retention.
When triple net leases are involved, the tenants seem to have a different attitude. VE usually means lowest upfront cost as possible, no matter what the long term consequence. If you aren’t paying utility bills, the management company or maintenance costs, you just want the building fast and cheap.
Owners who are more long term orientated see VE differently. More sophisticated owners will challenge their designers and contractors to dig deeper. Instead of typical building designs or building materials, they may request alternate designs or pay more if there is “value” somewhere other than lower upfront construction costs. Value could be defined as long term utility cost savings, building depreciation implications, using new materials or materials in a non-traditional way, recycling construction waste, more efficient work layouts, employee comforts which would lead to higher outputs, etc.
VE is not a design review or a cost-cutting exercise. It is a creative and organized analysis of a project for the purpose of achieving the essential functions at the lowest total costs (capital, staffing, energy, maintenance) over the life of the project.
Performed correctly, VE can provide cost savings and efficient systems. Performed incorrectly, however, VE can add costs, time and liabilities.
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To me, V/E should apply the principle of “pay me now or pay me later”. I can spec a cheaper tile or carpet, but it will most likely will require replacement sooner then a more costly version. So, did I apply V/E by using the cheaper product, I think not.
I think Richard missed the fundamental basis of Value Engineering by proposing that it should derive essentially from a Life Cycle Cost Analysis . That reasoning is fundamentally flawed because Value Engineering is not about cost but about Value.
Agreed that the determination of value is intrisincally linked to cost, but there it ends. We should not see cost as a synonym for value or see cost as an interchangeable term with value. These are two different matters.
It is not Life Cycle Cost Analysis that should drive Vaiue Engineering therefore. It is Value Management and this starts with the strategic definition of Value on the particular project – with input from project sponsor; project owner & stakeholders.
The process of determining what is (& of) value to a particular project and the prioritisation of these (into a value tree) is absolutely essential to the value engineering exercise (I would suggest) every project should be subjected to – regardless of whether it seems affordable as originally proposed or not.
I am proposing that value management and value engineering should be an integral part of the delivery of any project and this needs to be integrated into the project life cycle – i.e from project inception, through project planning & execution. It is a valuable project control tool, not a ‘add-on’!
The concept of Value Engineering is about optimising value cost effectively and in that sense it may in fact result in spending a little bit more to augment value however defined for a particular project- if deemed desirable. Value Engineering is definitely not a cost-cutting exercise (Richard is on the money on this) but a value optmisation exercise.
To be clear, a Life Cycle Cost Analysis may infact not be necessary if the long term costs are of relatively low value on the value tree.
To conclude, Value Engineering is a tool of value management. The latter is about value optimisation and starts with a definition of value for a particular project.
Great article and as a real estate developer it is ofter difficult to build a financial model that meets the lender’s underwriting so we jump in and use the term VE when in essence it is simply cutting the construction budget with disregard to the future value of achieving operating efficiencies, reducing load factors and improving the functionality to meet future growth patterns. We are more concerned about debt coverage ratios and IRR in order to meet financing requirements. Lenders should learn to appreciate VE from a long-term perspective on future value and cash flows.