“Value engineering” is a term frequently tossed around a construction project (usually right after the bids come in) that can best be defined as meaning, “We’re over budget! Somebody find a way to make it cheaper!” But proper value engineering in construction is not simply cost-cutting.
Proper value engineering is a rigorous process that isn’t actually concerned with the cost at all — it’s concerned with value, which is a very different thing. It began, almost by accident, during World War II.
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The history of value engineering
Lawrence D. Miles was a vacuum tube engineer for General Electric. But in 1938, he was transferred to GE’s purchasing department. When the United States became involved in WWII, supply shortages broke out along with the war, making the usual materials unavailable.
So Miles began to apply his engineering mind to the problem of resources: “What materials,” he wondered, “could be substituted for the ones typically used?”
The answers he arrived at allowed production to continue and provided a surprise bonus — the new materials were just as good or better than the originals. And better still, they were often less expensive.
In the years after the war, Miles would develop an entire methodology, similar to the scientific method, to make “value analysis” (as he called it) available to anyone making anything.
Miles’ procedure begins with four clearly defined terms: life cycle, function, cost, and value.
- Life cycle is the anticipated duration for which the item must carry out its purpose.
- Function is the successful performance of an item over its life cycle.
- Cost is the initial monetary outlay, supplemented by the anticipated funds required for maintenance and repair and any financial effects the item may have on other components.
- Value is the relationship between function and cost, expressed as a simple formula (f/c).
To add value, you increase function or decrease cost. Ideally, you do both.
In some cases, this is obvious. To publish this article by distributing it on carved stone tablets would have less function by being difficult and heavy and easily broken, and it would have more cost by requiring payment for someone to quarry the stone, chisel all the letters, and carry it to your office.
Obviously, there’s greater value to a blog post. But in construction, identifying these things is not always so obvious. So, a process was developed.
The value engineering process
Lawrence Miles codified his approach in 1947, and published the definitive book, Techniques in Value Analysis and Engineering in 1961, leading to the establishment in 1977 of the Miles Value Foundation.
Its affiliate, the SAVE Foundation continues his work, and trains professionals in the process — now called “value methodology.” The process can be broken down into five phases.
The 5 phases of value methodology
- Information: Gathering data
- Speculation: Generating ideas
- Evaluation: Analyzing and judging ideas
- Development: Expanding and investigating promising ideas
- Presentation: Offering ideas to decision makers
Suppose there’s a building being designed, and an issue is the air conditioning. It’s expected to cost a fortune to install and to operate. The task at hand is to apply value methodology to the problem.
- In the information phase, data is gathered without prejudice. The building is in the south, it’ll be full of people, it requires a lot of windows, it’s in a historic area, on a big lawn, it’s expected to look fancy, it’ll have offices and a kitchen and conference rooms, and it operates all day and night. Just the facts, because you don’t yet know which ones you’ll use.
- In the speculation phase, you generate ideas without judgment. Ideally, you have narrowed the problem down to two vague words, a verb and a subject.
If you’re too specific, like “better windows,” your options are limited. But if you’re more open-ended — “heat-gain reducer” — you can really generate ideas. So you just toss them out there. “Face all the glass north,” “Use high-insulation windows,” “Fill the basement with ice,” “Add awnings,” “Plant shade trees,” “Add fans.” Just list as many ideas as you can.
- In the evaluation phase, you judge the ideas. Ice in the basement? That’ll be messy and won’t last very long. Shade trees are good — but the downtown development board won’t allow them. But high insulation windows are a good possibility, as are added awnings.
- In the development phase, you expand on the ideas you think have merit. You price the options, check their availability, long-term costs, and maintenance requirements. And you end up with a winner.
- In the presentation phase, you offer your results to the owner — adding deep awnings is not free, but it costs less than insulated windows; they can’t be broken and will never need replacement, while still reducing heat gain.
So, the awnings increase function and add value. Plus, the reduced heat gain means you can install a smaller chiller, smaller fans, and narrower ducts, reducing the price of both installation and operation. So, you’ve reduced costs, adding even more value.
Value has been added!
How does value engineering work in construction?
Value engineering is often performed by the architect and the engineers during the design phase of a project and then again, with the contractor’s input, in the construction phase.
Value engineering in the design phase
The earlier in the design process value engineering is carried out, the better it works. It is sometimes carried out informally by architects and engineers, but on larger projects — and particularly in public works — the process can be mandated in the design contract, dictating workshops and methods.
Organizations like SAVE actually accredit value methodology professionals who can be brought in as consultants to the design team. And recently, complex software packages, such as Autocase, have begun to digitize the process, allowing very detailed analysis of many functions, such as productivity, absenteeism, health and environmental impacts, water efficiency, and many others.
Ideally, contractors and members of the trades would be brought in during the building’s design phase to contribute their expertise and knowledge of supply chains (but in practice, this is seldom the case).
Value engineering in the construction phase
Most opportunities for value engineering involving contractors occur in the construction phase, since that’s often the first opportunity the contractor has had to evaluate the project.
Though it’s late in the game, there are often still many opportunities to increase a project’s value. And often this can be valuable for the contractor as well. In many larger projects and almost all public projects, there is a contractual incentive for a contractor to identify value engineering opportunities.
The General Services Administration, for example, encourages Value Engineering Change Proposals (VECPs), and offers contractors up to 55% of the cost savings for opportunities they identify that are accepted and turned into material substitutions or change orders. So, it’s worth taking the time to apply the process as early as possible before materials are ordered and work is performed that limits the opportunities to make changes.
And remember, adding value doesn’t simply mean reducing initial cost. If a design decision or a material is something that you know, as an experienced contractor, is inferior and likely to cause trouble and expense for the owner down the road, you have a chance to increase the value of the project by recommending a change, even if your recommendation has a higher initial cost. Since project failures, even if they are design issues, often end up making trouble for the contractor in terms of unbillable time, payment delays, and legal fees, it’s in everyone’s best interest to create conditions and use materials that increase project value.
Value engineering in design-build
Perhaps the best scenario of all for value engineering is with a design-build contract.
In this case, the design is happening concurrently with cost estimating, and the contractor has some input early in the process in the design and the specifications for a project, using their experience and understanding of materials availability and uses to help the owner make high-value decisions.
How value engineering affects contractors
When seen as strictly a cost-cutting exercise, there’s little incentive for a contractor to embrace value engineering. It is, after all, designed to benefit the owner.
However, true value engineering doesn’t necessarily reduce the contract cost or diminish the price of the work. Creating value often requires the owner to spend a little more up front to reap rewards down the line.
Perhaps the greatest advantage to value engineering for contractors is in the trust it builds. By leveraging your experience, your expertise, and your relationships to add value to the project, you build a level of trust with your client that will lead to repeat business, an enhanced reputation, and fewer payment disputes. People are generally happy to hand their money over when they know they’re getting real value for it.