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Three Ways to Put the Value Back in Value Engineering

For construction professionals, value engineering is a term commonly associated with keeping projects on budget, but the full meaning of the term has been diluted.

In casual conversation, general contractors will admit that value engineering traditionally has been about cost-cutting—sometimes at the expense of overall project value. This is because optimizing isolated parts for cost or efficiency can have a detrimental effect on the whole, and optimization so late in the process—at the construction stage—is the worst-case scenario. Because so many design decisions are already locked in by the time construction starts, synergies between systems can’t be capitalized on.

For example, consider an architect that specifies dynamic glazing, super-insulating walls and small mechanical systems for a building in a cold climate. Together, those elements can lead to exceptional building functionality in the form of comfort, ventilation and energy costs. In a traditional lowest-bidder-wins setup, it would not be uncommon for a contractor in value engineering mode to seek to reduce glazing and insulation, simply because they make the capital costs higher than traditional projects. However, that’s only a sliver of the design and any related reductions fail to account for the fact that eliminating glazing and insulation in a cold climate will require upsizing the mechanical systems and will result in higher capital and operating costs over the building’s lifecycle. As a result, money is wasted on higher utility costs for literally decades to come.

However, there are three forces that will help bring true value back into value engineering.

1. With the rising popularity of design-build lump sum or best value contracts, contractors have an opportunity to serve as champions for their clients. They can seek out efficiencies between building systems, instead of squeezing each system to the detriment of the whole.

2. Participate in value engineering workshops, which can have great impact. These sessions, for clients such as the U.S. Department of State, New York City Office of Management and Budget, and the State of Utah, examine the functionality sought for a project and any mismatches between functions, project goals and the budget. Opportunities to improve the project are explored, as well as how to price out those improvements while considering operational costs and any synergies between them.

Owners can confidentially sit down with their design teams to discuss where additional costs might deliver added value, and which capital cost reductions would likely cost them more money over time. While forecasts of lifecycle costs aren’t always perfect, the analysis still produces a relative idea of which strategies were worth the investment over time.

3. Value engineering now has access to a sophisticated new set of economics software tools, which can conduct Triple Bottom Line Cost Benefit Analysis (TBL-CBA) in real time to determine who benefits and by how much in dollar terms from a given design scenario. These advances in technology allow the building industry to put to work the data from numerous studies of buildings that would otherwise languish on the bookshelves of academics or government agencies.

Technology advancements can help in the following areas.

  1. By using life cycle cost analysis, it’s possible to develop a much more complete cost picture than traditional cost estimates, which can often give a lopsided view of costs including upfront labor and materials costs instead of the total cost of ownership.
  2. By quantifying costs and benefits across the triple bottom line (financial, social and environmental), software calculates not only the financial ROI of an incremental dollar spent factors such as super-insulating walls and windows in the form of capex and opex, but also the social improvement in tenant productivity and health stemming from better thermal comfort. Plus, it can determine the environmental improvements from factors such as avoided local air pollution. Presenting stakeholder benefits in this way has shown this to prevent unexpected delays due to NIMBYism because the local community understands and appreciates why they should support the project in very clear dollar terms.

  3. By localizing the analysis using data from the project’s real estate market, climate, economy, wage rates and more, TBL-CBA software avoids trying to artificially apply cost and benefit values from past projects in other locales, which can be misleading and lead to poor design decisions.

Leading designers and general contractors know this already. That’s because lighthouse clients including the State of California, City of Los Angeles and San Francisco International Airport are demanding better than the so-called value engineering of yesterday. Instead, they’re requesting—or requiring via RFP language—that value is brought back into value engineering by looking at alternatives holistically and using powerful new analytical tools to do so.

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