The good and the bad of value engineering
Almost everyone in the healthcare design and construction industry has faced the problem of the over-budget project (often the result of having too many wants and too small a wallet). The most common solution is to “value engineer.” But what does that really mean? Too often the focus of value engineering is on cost cutting alone. True value engineering, however, is not simply a matter of cutting costs, but rather giving careful consideration to all options, always with the project's goals in mind.
As an architect and a contractor who specialize in healthcare projects, we can attest to the fact that value engineering has become a standard practice for almost all healthcare projects today. Often, as we've indicated, this is at the expense of the project's quality. But it doesn't have to be this way. A well-planned and well-executed value-engineering process can improve a project without sacrificing its essential integrity.
Value Engineering Defined
By definition, the aim of value engineering is to help the owner improve efficiency and decrease operating costs. In the construction industry, however, its most common purpose is to bring over-budget construction projects back within budget. In the book Quality in the Constructed Project, the American Society of Civil Engineers states, “Value engineering of a design focuses on potential cost saving…where the usual value engineering question is ‘Is there money to be saved?’” However, simply reducing cost at the expense of quality is not value engineering but merely cost cutting.
The Society of American Value Engineers International (SAVE International) defines value engineering as a “function-oriented, systematic, team approach to provide value in a product, system, or service.” The definition further explains that while the process is often “focused on cost reduction, other improvements such as customer-perceived quality and performance are also paramount in the value equation.”
Value engineering is, in short, a systematic, organized approach to obtaining optimum value for each dollar spent. Another definition of value management is “a disciplined effort to analyze the functional requirements of a project for the purpose of achieving the essential functions at the lowest total cost (capital, operating, and maintenance) over the life of the project.” When applied to construction, the analysis must be performed within the standards and criteria established by the owner. Through a system of investigation using trained, multidisciplinary teams, both value and owner requirements are improved by one of the following:
Eliminating or modifying elements not essential to required functions.
Adding elements that achieve required functions that have not as yet been attained.
Changing elements to improve quality or performance to meet more desired levels established by the owner/user.
Construction and design professionals use value engineering throughout the design process to regulate the costs on a project budget. Larry Miles, considered by many to be the father of value engineering, introduced this process nearly 60 years ago. When Miles developed the analytical field of value analysis for General Electric after the Second World War, he identified two elements of the value equation—function and cost—and balanced them against one another. As Miles approached the problem of enhancing value, his objective of value analysis was to identify all elements of function and cost, and to express their mutual interdependency so that an informed decision could be made between the two. His equation was:
Value = Function/Cost
Function = the specific work that a design/item must perform.
Cost = the life-cycle cost of the product.
Value = the most cost-effective way to reliably accomplish a function that will meet the user's needs, desires, and expectations.
In other words, an item that maximizes function with a minimal cost is of greater value than an item of lesser function with the same cost. Conversely, an item that serves little or no function but has a high cost is considered to be of little or no value.
According to Miles, value engineering is basically “a creative, organized approach whose objective is to optimize cost and/or performance of a facility or system.” The intended purpose is to improve the value obtained by an owner sponsoring a constructed project.
Design and Construction Applications
The use of value engineering in the typical hospital construction project has been used sporadically, usually (as we've already indicated) when the design team encounters a budget problem. On many projects, value-engineering exercises involve bringing the project design team together quickly to “fix” the problem and reduce costs. Often the owner, designer, and contractor have so much invested in their disciplines that the flexibility and open-mindedness required to achieve true value engineering is not achieved. Costs may be reduced, usually not to a great extent, but often with a reduction in quality and value.
An example of this is a hospital project currently under construction outside Denver. The project budget began at $50 million. During schematic design, the owner chose to benchmark other newly completed hospital facilities in the Denver area and found deficiencies in his project's space program. To maintain the hospital's competitive edge, management chose to increase the project's scope and budget. At the completion of schematic design, the budget was increased by almost 10% to cover these changes. At the end of design development, however, the project's budget was over by $2.6 million. The next obvious move was value engineering. Unfortunately, it was too late.
Over the course of several weeks, the team (including the owner) evaluated ways to reduce cost. Everything became fair game, and no stone was left unturned. The contractor did a remarkable job of disassembling the project and putting it back together, using the same square footage while removing more than $2 million from the job. Although the exercise did preserve the overall design, value was lost.
For example, all landscaping, water features, irrigation, and even a proposed labyrinth were omitted from the project. A glass canopy at the main entry was changed to acrylic. Products originally specified to be LEED®-certifiable were either downgraded or removed, eliminating the facility's option of becoming LEED-certified.
To achieve true value engineering, the effort should involve looking beyond a simple reduction in cost or achieving the project budget. Simply achieving the budget numbers does not mean that optimum value is achieved. This can be achieved (with the owner's approval) by:
Providing more building scope for the same budget.
Providing the same building scope for a reduced budget.
Providing less building scope for an even more reduced budget.
Today, most healthcare building projects are handled by a team of professionals. Typically, the owner goes through an architectural selection process to commission the design team. This includes selecting architecture and engineering (A/E) professionals. Some owners rely on the assistance of a program manager to represent them in this process. Once the A/E team is in place, early selection of a general contractor and/or construction management consultant helps round out the project team.
Once a project begins, a space program has been identified, a list of project requirements (defining scope and function) has been developed, and a budget (defining cost) has been set. As the design team moves through the various phases of the project (particularly schematic design and design development), the construction team reviews the design and prepares preliminary statements of probable cost. The project team then evaluates the design and cost against the initial project scope and budget. This monitoring process, continued throughout each phase, gives the team and the owner a clear indication as to how well the project is tracking according to budget.
When value engineering comes into play, it should be to obtain the optimum functional balance among construction costs, user requirements, and life-cycle costs. Conducted in this manner, it should produce savings in:
Initial capital construction costs, without detriment to costs of operations and maintenance and/or income, and
Predicted follow-on costs, such as facility staffing, operations, and maintenance.
In value-engineering exercises, the construction professional often provides cost-reduction ideas, with the owner and design team then evaluating those ideas. This may result in lower costs but may not provide much value, because the ideas and input of all team mem-bers have not been considered in the process.
On a recent hospital renovation project in California, for example, the budget estimates provided by the contractor were slightly over budget. Rather than conduct a formal value-engineering process, the contractor was asked to submit to the project team value-engineering suggestions for bringing the project back on budget. While a format such as this may or may not achieve its goal, the value-engineering effort would in any case not be maximized, because of failure to use the combined brainpower and creativeness of the entire project team. Specifically, the designers, engineers, users, facilities representatives, and owner were not asked for their ideas. As a result, many potential cost savings or value-producing ideas were undoubtedly left out of the process.
The basic premise behind the formal value-engineering process is teamwork—embracing the idea that two (or more) heads are better than one and that there can always be a different (and perhaps better) approach to satisfying a particular need than the first thing that comes to mind. Value-engineering teams are typically made up of a certified value specialist (CVS), owner's representatives, designers and consultants, the construction team, a cost estimator, building management staff, and third-party (independent) reviewers. Teams that include members of each of these groups are formed and facilitated by the CVS. Often, the formal value-engineering process occurs in a three- to five-day structured workshop, although it can be shorter or longer, depending on the type and complexity of the project. The workshops typically go through five phases:
Information gathering—an initial briefing by the project team to develop an understanding of the project requirements and design, the status of the budget and schedule, and constraints.
Functional analysis—examination of the project's functional requirements within budgetary limitations, to enhance understanding of why the project is being built and what the final result should be.
Creativity/brainstorming—developing and listing ideas and options for value engineering, keeping in mind the functional requirements of the project.
Analysis—expanding the creative ideas into workable solutions, evaluating their impacts and costs, and ranking them in terms of cost, feasibility, and value received.
Recommendation—presentation of the value-engineering proposals, expected savings, and value results in a formal report.
During the functional analysis phase, the team views the project functionally in three ways to help them better analyze and study options:
Basic function: That which is essential to the performance of a user function or the function describing the primary utilitarian characteristic of a product or design to fulfill a user requirement. A key defining question: “Can this function be eliminated and still satisfy the user?”
Required secondary function: Any function that must be achieved to meet codes, standards, or owner requirements. For example, the basic function of a hospital is to treat patients. A fire-protection sys-tem is not required to treat patients but is required for the project.
Secondary function: That which, if it is removed from the design, still allows both the basic and required secondary functions to be met. For example, leveling earth under slab is a secondary function. The basic function of slab is to support load. Leveling is not required to support the load.
During the creative/brainstorming phase, teams review the proj-ect items and answer the following questions for each item:
What is it?
What does it cost?
What does it do (i.e., why is it required)?
What is it worth?
What else would do the job?
What would that cost?
The key to success of value-engineering analysis is developing a more precise and appropriate definition of value. The owner is responsible for defining the quality level of a project. The designer is responsible for producing a design that meets those expectations or requirements. Most of the time, owners tend to define only the lower limit of those expectations. Designers often exceed those minimums, believing that better quality always equals better value, but this isn't always the better approach. Better quality usually comes at an increased cost and is not usually on a linear relationship with value. It's possible that a one-level increase in quality could come at a two- to three-level increase in cost. This is why the owner must establish what constitutes value.
On the Denver project mentioned above, which was over budget, value engineering identified a less expensive exterior skin material (plaster) that could be substituted for brick (primary exterior material) on interim exterior walls that were identified as future expansion zones. Unfortunately, those very walls faced a major highway and represented the first impression people driving toward the campus would receive. How does one place a value on aesthetics? After discussions among the design team, contractor, and owner, they compromised on a solution: using a combination of brick and plaster.
For a project that is within budget, the value-engineering emphasis should focus on improving value in terms of operations, flexibility, expandability, life cycle, and quality. For a project over budget, the focus should be on reducing project costs without eroding value. If a substantial cost reduction is required (more than 10%), the value-engineering exercise should focus on reconsidering the owner's objectives.
A Positive Case History
During a large hospital addition and renovation project in California a few years ago, the client required that value-engineering exercises be conducted during schematic design and design development, regardless of the budget estimates. Members of the design team, the owner, the owner's project management team, facilities representatives, user group representatives, and select, independent outside reviewers were brought together for a two-day work session. A cost-management professional with extensive experience in value engineering led the session.
The first day was spent reviewing the design, followed by individual work-group sessions focusing on various components of the project. First cost was not the main consideration. Improved function, better life-cycle costs, good durability, and ease of maintenance, among other factors, were also studied. At the conclusion of the work sessions, the group's ideas were gathered and presented to the combined group for review. Some ideas were considered not feasible and removed, while the remaining ones were submitted for further study and pricing. The ideas ranged from a study of revised structural framing systems, to changing exterior skin designs from stucco to precast panels, to mechanical system design alternatives, to alternative glazing plans that might improve mechanical efficiency.
With the help of the team, the cost management professional prepared a report summarizing the ideas and identifying their respective advantages and disadvantages, and their impacts on first cost and life-cycle costs. The final report was presented to the owner for selection of value-engineering items to be incorporated into the project. The list of items far exceeded the required value-engineering target and provided real options to increase the value of the project, sometimes individually at additional cost but at an overall reduced project cost.
Many value-engineering sessions were scheduled at regularly planned design intervals that coincided with normal review and approval processes. Unfortunately, however, many good value-engineering suggestions offered at these stages were not used because they came too late in the process to be incorporated into the design.
The benefit of a well-run value-engineering process to the owner will be a better, more cost-efficient project that meets his or her needs and objectives. The process can also have substantial benefits for the design and construction team, including fostering a teamwork approach to solving problems, reducing design team expenses by requiring fewer redesigns, allowing a more efficient construction process, and producing in the end a truly satisfied customer. HD
Anthony J. Haas, AIA, ACHA, is a Senior Principal with Watkins Hamilton Ross (WHR) Architects, in Houston and Dallas. With more than 20 years’ experience in healthcare design and medical planning, his particular focus is on emergency center design. He has worked on projects that range from total replacement facilities to small renovations. To contact Haas, phone 713.665.5665, e-mail firstname.lastname@example.org, or visit http://www.whrarchitects.com
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