OPTIMIZING

YOUR CONSTRUCTION INVESTMENT THROUGH "VALUE ENGINEERING"

Director

A. J. Dell'Isola, P.E. of Value Engineering Services McKee-Berger-Mansueto, Inc. 1120 Connecticut Avenue, N.W. Washington, D. C. 20036

By:

Introduction Value Engineering is a relatively new term (late fifties) which has been developed principally through the Department of Defense (DOD) with emphasis on Cost Reduction and Systems concept. The concept spread to the construction area in the mid-sixties starting in the Naval Facilities Engineering Command and then to other DOD construction agencies. Presently, this concept has been adopted by Facilities Engineering Command (FECA) of the Department of Health, Education, and Welfare, and the Public Buildings Service of General Services Administration. The concept is a useful tool for the construction manager in controlling costs, improving cost effectiveness and in any trade-off analysis required to complete a project. Definition Value Engineering is an objective, systematic method of optimizing the total cost of a facility or system for a specified number of years. Factors to be Considered

VALUE ENGINEERING Facilities Construction

Total

Cost Distribution TOTAL COSTS OF OWNERSHIP -

CONTRACTOR

SUPPLIER

M & 0 CONTRACTOR

Selects

Procures and Constructs

Produces and Delivers
L

Operates, Maintains and Replaces

In the Value Engineering methodology, optimization of costs are attempted by a systematic development of alternate proposals of isolated high cost areas. During these efforts a number of factors are involved. A principal factor is the "Total Cost Concept." By total costs is meant the ultimate costs to construct, operate, maintain and replace a facility or system for a specified life cycle. Figure 1, graphically illustrates the approximate breakdown of the total costs of a typical facility and where the owners money is spent over It is interesting to note a normal life cycle. that the initial costs are less than one-half the total costs. The graphs typify the total cost of ownership for your home and car, as well as the It is cost of ownership of a typical facility. the emphasis on first or initial cost, with the resulting failure to take into account the total effect of related cost elements, that is probably the greatest shortcoming in today's planning, programming, and design of facilities. The graphs in Figure 1, do not include the cost of the people involved in occupying the In some cases these costs are considerfacility. For example, Figure 2, is a chart which able. indicates the appropriate magnitude of the areas 1

Figure

1

of total cost including the "people" costs of the nurses, doctors, technicians, administrators, etc. of a hospital over a twenty (20) year span. HOSPITAL LIFE CYCLE COSTS (20 Years)

P
Design

HELP! 1

(0.1X)

SYSTEM OPERATIONAL COSTS (7X) Figure 2

Figure 3, is an approximate curve which shows whose decision governs the expenditures of funds. It points out that the designer is the one whose decision has the greatest impact on costs. The construction contractor during his phase can influence the cost of the installation only a few percent. The maintenance and operations personnel during their phase can influence M&O costs slightly, and the costs of the operating people are fairly well fixed by the facility layout.

SlYlWOS POlENllll FICILITIES

vs TIME

COSSlSU61lSW

MAJORDECISION MAKERS*
FACILITY COSTS

LIFE CYCLE COSTS A h

USING AGENCY Stmd*rds b Crit*ri*

Figure

4

TIME
- PERSONS

-

LIFE CYCLE

WITH IMPACT ON TOTAL CGSTS

Figure

3

Figure 4, is a graph which represents savings potential versus time. It graphically illustrates the greatest savings potential occurs during the development and design phases. The construction manager should recognize these facts and allocate major efforts toward optimizing cost effectiveness during the initial design phases of a project. The Conventional Approach

See Figure 5, "Decision Impact of Disciplines on Total Building Costs." This Figure points out that each discipline's decision has impact on all others. One cannot optimally design facilities if each discipline is compartmentalized or if major portions are sub-contracted out and performed in isolation. Effective decisions involving total costs require a multi-disciplined team knowledgeable in all costs. The construction manager should realize this and take actions to assure more effective decisions. In addition, the construction manager should recognize that the conventional approach has tended to limit the ability of the design personnel to develop and utilize creative problem solving techniques. Value design Engineering - A Fresh Approach

The present method of design for a facility involves principally the designer developing plans and specifications which conform to the design criteria of the owner. In essence, what normally occurs is that each discipline ends up generating requirements, reviewing these requirements, establishing and modifying their particular criteria, even the standards and criteria of the owner. This approcah usually results in decisions which are not the most economical for the end function of the facility. Instead, this approach fosters or encourages economical decision within each area with maximum safety factors deemed necessary by each discipline. Although this system is not totally without merit, it tends to sacrifice end system performance by maximizing sub-system performance. The result is total life cycle costs are not adequately considered. 2

How can the VE approach be applied to the of facilities by construction managers?

First, it is their responsibility to become familiar with these new concepts. They should realize that both time and money must be allocated to achieve results. The magnitude of the effort need not be large, ranging from 0.1 to 0.3 of a percent. The effort should be conducted at a time when design criteria can effectively be challenged. A team should be gathered which has access to operational and maintenance costs. The team effort should be directed solely at seeking out high cost or poor value areas using life cycle costing, and to develop lower cost alternates. The effort should supplement normal methods and provide decision makers with better information to make more effective selections. The efforts are more effective when supervised by a full-time specialist. However, meaningful results can be achieved by parttime efforts formally applied by individuals trained in the Value Engineering methodology.

Decision of Disciplines on Total Building

Impact

Figure 7 outlines the principal points of these incentive provisions. It should be noted that contractor's are contractually allowed sharing. Savings to be calculated on the basis or reduction in the initial contract and the proposal, called Value Engineering Change Proposal (VECP), must require a change to contract documents. PRINCIPAL POINTS OF CLAUSES * Allows Proposals Contractor Sharing Award Existing - Not Before Plans and [VECPs]

Costs

Architectural

*

Made After

Basic of Bid is Specifications * Value Engineering

Change Proposals

Must Effect * Jote: )ffice Chart Bldg. Based on Typical Commercial Hi-Rise Impact Will Vary by Type ofStructur# Figure 5 Proposals

a Change to the Contract Not Subject Decision Figure to Disputes Final 7 Clause

Government

As a minimum effort, a 40 hour workshop should be conducted during the initial design phases. The training of key individuals will have a follow-on benefit of increasing cost sensitivity and improving communications throughout the length of the project. Secondly, incentive contracting should be used wherever feasible. The Department of Defense has directed the Armed Services, through Armed Services Procurement Regulation No. 17, to use Value Engineering incentive provisions in contracts. Figure 6 outlines the basis of these provisions.

In addition to the DOD Agencies, the Public Buildings Service of the General Services Administration is including incentive provisions in their construction contracts. As a result, the recent construction management contracts they have awarded will be required to place incentive provisions in contracts over $100,000. Figure 9 is a copy of the contract provision. As for results, Figure 9, is a summary results realized by the U. S. Army Corps of for the past seven years. The approval rate VECP's has been over fifty percent with the percentages varying between fifty and sixty for the contractor. of the Engineers for sharing percent

These results should impress the construction manager. They point out that any additional costs incurred by formally applying the value engineering methodology should be more than offset by "hard" savings possible through placing incentive provisions in the construction contracts. Value Engineering Application Techniques plan

The following is an outline of the job approach for the construction area: A. Information 1. Items a. b.
C.

Phase required Owner requirements given to A&E Plans and specifications Cost estimates available Design data Applicable standards and criteria

d. e. 2.

Steps a. b. Breakdown Functional Tentative of data in workable area evaluation of areas high cost idea listing

Figure

6
3

C.

. .

GENERAL

SERWCES
PUBLIC BUILDINGS

;X.BMI1iNiS?-RATION
SBRVICE

SECTlION 001.5
VALUE ENGINEERING INCXNTIVE CLAUSE

1. INTENT AND OB]ECTiilES---This clause applies to any cost reduction proposal (hereinafter referred to as a Value Engineering Change Proposal or VECP) initiated and developed by the Contractor for the purpose of changing any requirement of this contract. This clause does not, however, apply to any such proposal unless it is identXed by the Contractor, at the time of its submission to the Government, as a proposal submitted pursuant to this clause. 1.1 VECPs contemplated are those that would result in net savings to the Government by providing either: ( 1) a decrease in the cost of performance of this contract, or; (2) a reduction in the cost of ownership (her&after referred to as collateral costs) of the work provided by this contract, regardless of acquisition costs. VECPs must result in savings without impairing any required functions and characteristics such as service life, reliability, economy of operation. ease of maintenance, standardized features, esthetics, fire protection features and safety features presently required by this contract. However, nothing herein precludes the submittal of VECPs where the Contractor considers that the required functions and characteristics could be combined, reduced or eliminated as being nonessential or excessive for the function served by the work involved. 1.2 A VECP identical to one submitted under contract with the Contractor or another Contractor be submitted under this contract. any other may also

3.3 An estimate of the effects the VECP would have on collateral cos:s to the Government, including an estimate of the sharing that the Contractor requests be paid by the Government upon approval of the VECP; 3.4 Architectural, engineering or other analysis in sufficient detail to identify and describe each requirement of the contract which must be changed if the VECP is accepted, with recommendation as to how to accomplish each such change and its effect on unchanged work; 3.5 A statement of the time by which approval of the VECP must be issued by the Government to obtain the maximum cost reduction during the remainder of this contract, noting any effect on the contract completion time or delivery schedule; and, 3.6 Identification of any previous submission including the dates submitted, the agencies numbers of the Government contracts involved, vious actions by the Government, if known. of the VECP involved, the
and the pre-

2. SUBCONTRACTOR INCLUSION--The Contractor shall include the provisions of this clause, with the predetermined sharing arrangements contained herein, in all first-tier subcontracts in excess of $25,000 and any other subcontracts which, in the judgment of the Contractor is of such nature as to offer reasonable likelihood of value engineering cost reductions. At the option of the first-tier Subcontractor, this clause may be included in lower tier subcontracts. The Contractor shall encourage submission of VECPs from Subcontractors; however, it is not mandatory that VECPs be submitted nor is it mandatory that the Contractor accep: and/or transmit to the Government VECPs proposed by his Subcontractors. 3. DATA REQUIREMENTS-As ing information shall be submitted each VECP: a minimum, the followby the Contractor with

4. TROCESSINC PROCEDURES-Six copies of each VECP shall be submitted to the Contracting Officer, or his duly authorized representative. VECPs will be processed expeditiously; however, the Government will not be liable for any delay in acting upon a VECP submitted pursuant to this clause. The Contractor may withdraw, in whole or in part, a VECP not accepted by the Government within the period specified in the VECP. The Government shall not be liable for VECP development cost in the case where a VECP is rejected or withdrawn. The decision of the Contracting Olfjcer as to the acceptance of a VECP under this contract shall be final and shall not be subject to the “Disputes” clause of this contract. 4.1 The Contracting Officer may modify a VECP, with the concurrence of the Contractor, to make it acceptable. If any modification increases or decreases the savings resulting from the VECP, the Contractor’s fair share will be determined on the basis of the VECP as modified. 4.2 The Contracting Officer may accept, in whole or in part, a VECP submitted pursuant to ihis clause by giving the Contractor written notice thereof reciting acceptance under this clause. However, pending issuance of a formal change order or unless otherwise directed, the Contractor shall remain obligated to perform in accordance with the terms of the existing contract. 4.3 An approved VECP shall be finalized through an equitable adjustment in the contract price and time of performance by the issuance of a change order pursuant to the provisions of this clause bearing a notation so stating. Where an approved VECP also involves any other applicable clause of this contract such as “Termination for Convenience of the Government,” “Suspension of Work,” Changes,” or “Differing Site Conditions” then that clause shall be cited in addition to this clause. 1 GSA FORM 2653

3.1 A description of the difference between the existing contract requirement and the proposed change, and the comparative advantages and disadvantages of each ; including justification where function or characteristic of a work item is being reduced; 3.2 Separate detailed cost estimates for both the existing contract requirement and the proposed change, and an estimate of thq change in contract price including consideration of the costs of development and implementation of the VEC? and the sharing arrangement set forth in this clause;

B-711

Fig.

8 (cont’d) 4

5. COMPUTATIONS FOR CHANCE IN CONTRACT COST OF PERFORMANCE-Separate estimates shall be prepared for both the existing contract requirement and the proposed change. Each estimate shall consist of an itemized lrrakdown of all costs of the Contractor and all Subcontractom’ work in sufficient detail to show unit quantities and costs of labor, material, and equipment. 5.1 Contractor development and implementaLion costs flu the VECP shall be included in the estimate for the pn,posed change. However, these costs will not be alk,wal,lc if they arc otherwise reimbursable as a direct rhargc under this contrart. 5.2 Government costs of processing or implementation of a VECP shall not be included in the estimate. 5.3 If the difference in the estimates indicate a net reduction in contract price, no allowance will be made for overhead, profit and bond. The resultant net reduction in contract cost of performance shall be shared as stipulated hereinafter. 5.4 If the difference in the estimates indicate a net increase in contract price, the contract price shall be adjusted pursuant to Clause 23 of the General Conditions of this contract. 6. COMPUTATIONS FOR COLLATERAL COSTSSeparate estimates shall be prepared for collateral costs of both the existing contract requirement and the proposed change. Each estimate shall consist of an itemized breakdown of all costs and the basis for the data used in the estimate. Cost benefits to the Government include, but are not limited to: reduced costs of operation, maintenance or repair, extended useful service lift, increases in useable floor space, and reduction in the requirements for Government furnished property. Increased collateral costs include the converse of such factors. Computations shall be as follows: 6.1 Costs shall be calculated over a 20.year period on a uniform basis for each estimate and shall include Government costs of processing or implementing the VECP. 6.2 If the difference in the estimates as approved by the Government indicate a savings, the Contractor shall divide the resultant amount by 20 to arrive at the average annual net collateral savings. The resultant savings shall be shared as stipulated hereinafter. 6.3 In the event that agreement cannot be reached on the amount of estimated collateral costs, the Contracting Officer shall determine the amount. His decision is final and is not subject to the provisions of the “Disputes” clause of this contract. 7. SHARING ARRANGEMENTS--If a VECP by the Government, the Contractor is entitled instant contract savings and collateral savings not tives, but rather to the full extent provided for in is accepted to share in as alternathis clause.

For the purposes of sharing under this clause. thr trrm “inStan: contract” shall not inrludc any rhangrs to ,,r other modifications of this contract. executed subrcquent to arceptance of the particular VECP. by which the Covrrnn,cn: increases the quanti:y of any item of work or adds any item of work. It shall. howcvcr. inciudc any ,~stcnsio,, ,,I the instant contract through exercise of an option tif any1 provided under this rontrart after acceptance of the VECP. 7. I Whrn only the prime Contractor is involved, hc shall rc*ceive 50’$ and the Government 5070 of the net rrduction in the rest of pcrf,,rmanre of this contract. 7.2 When receive 3O’%, merit 40% of this contract. of the first-tier terms of their 7.3 receive a first-tier Subcontractor is involved, he shall the prime Contractor 30% and the Governthe net reduction in the cost of performance of Other Subcontractors shall receive a portion Subcontractor savings in accordance with the contract with the first-tier Subcontractor. the Contractor shall net collateral savings.

When collateral savings occur 20% of the average one years

7.4 The Contractor shall not receive instant savings or collateral savings shares on optional work listed in this contract, until the Government exercises its option to obtain that work. 8. DATA RESTRICTION RIGHTS-Tine Contractor nag restrict the Government’s right to use any sheet of a VECP or of the supporting data, submitted pursuant to this clause, in accordance with the terms of the following legend if it is marked on each such sheet: The data furnished pursuant to the Value Engineering shall Incentive Clause of contract not be disclosed outside the Government, or duplicated, used, or disclosed in whole or in part, for any purpose other than to evaluate a VECP submitted under said clause. This restriction does not limit the Government’s right to use information contained in this data if it is or has been obtained, or is otherwise available, from the Contractor or from another source, without limitations. If such a proposal is accepted by the Government under said contract after the use of this data in such an evaluation, the Government shall have the right to duplicate, use, and disclose any data reasonably necessary to the full utilization of such proposal as accepted, in any manner and for any purpose whatsoever, and have others so do. In the event of acceptance of a VECP, the Contractor hereby grants to the Government all rights to use, duplicate or disclose, in whole or in part, in any manner and for any purpose whatsoever, and to have or to permit others to do SO, data reasonably necessary to fully utilize such proposal on this and any other Government contract.

2

GSA

Form

2653

(8-71)

(Back)

Figure 5

8

See attached functional evaluation worksheet Figure 9a for a Pencil which outlines the function, cost and worth approach so vital to the successful application of the VE methodology. In addition, Figures 10, 11, and 12 are attached as other examples of different types of functional analyses techniques applied to construction. FY B. Speculative 1. Steps a. b. Team review and generation of a comprehensive idea listing by study team Brainstorming and review of idea listing by study teams and owner or his representative Development of final idea listing Phase
65 66 67 68 69 70 71

SAVINGS FROM VECP'S ARMY CORPS OF ENGINEERS [Gov't Share Only] NUMBER APPROVE1
48 80 140 183 324 232 285

MILITARY $116,700
107,600 259,600 505,700 627,000 450,000 725,000

CIVIL $ 140,600 199,000
402,100 526,600 1,252,OOO 540,000 848,000

TOTAL
257,300 306,600 661,700 1,032,300

1,879,OOO
990,000 1,573,ooo

C.

Figure

9

WORKSI-1EET

2a

ORIGINAL

COST

$0.07:
0.01

Figure

9a

6

Figure

12

C.

Analytical 1. Steps a. b.
C.

Phase

d. e.

Evaluation of total listing and selection of high cost areas from idea listing for study Breakdown of selected ideas for indepth analysis Brainstorming and investigation of areas isolated Review and revisions Preparation of proposal drafts

2. 3. 4.

Review

and revisions of final of report

of proposals proposals

Preparation Submission

D.

Proposal 1.

Phase

Review of results of analytical phase with owner or his representative to gain additional pertinent information and enhance implementation. 8

Figures 13 and 14 represent typical examples of design type changes performed through actual studies. As for potential program results of an organized VE approach, Figure 15, lists the recent results obtained from studies conducted within a construction program of a Federal Agency. The results indicate a savings potential of up to ten percent of total program costs are possible.

Figure 9

13a

E3LE-YATOI3S

COMPUTER

FAC 1 LI TY LAB,

$

PHOTOGRAPHIC INSTRUMENTATION LAB, OFFICE OFFICE

503,oo 500,000

3.7 25 41 32 43 44 29 I

$

92,000 67,OOcl 374,000 486,000 907,000 34G,OOO 183,700

37 4 6 8 14 8 6

$ 85,000 32,OQO 73,OOO 65,00!? 490,000 20,000 38,600 $803,600

900,000
2,600,000 3,600,OOO 2,050,OOO 1,525,OOO
I

BUILDING* BUILDING FACILITY” LAB.”

COMPUTER CHEMICAL

TOTAL
*

TOTAL COST INCLUDING MANAGEMENT EVIEW LIMITED TO EXPANDED IDEA LISTING B NO INDEPTH STUDY), Figure 15 10

$11,675,000 FOR VE STUDIES

$2,255,700
BRIEFINGS --

$lOO,OOO-I-

USURYZONE
VALUE AS LOVER 8 HOUSEI:E~ER

SPOUSE

sLt#ERY

ZONE

Figure

16

Conclusion Value Engineering is a proven tool to cost reduction. In fact, today over 300 full-time specialists are working in the Department of Defense in this area, Other government agencies, such as the Facilities Engineering and Construction Agency of the Department of Health, Education and Welfare, and Public Buildings Service of General Services Administration, and the Coast Guard of Department of Transportation, have adopted the concept. Various state governments, the first being Massachusetts, have established programs. In the private sector, many major product manufacturers have adopted full-time programs. Foremost among these firms are: MinneapolisHoneywell, Joy Manufacturing, General Electric, Philco-Ford, Lockheed, Sylvania and Radio Corporation of America. 11 The new concept of construction management requires new thinking to reduce unnecessary costs. One new thought is worth considering. If you could receive additional overtime salary to use the VE approach and could realize ten percent of any savings you could generate during this period, do you believe you could turn out more economical designs? If the answer is yes, efforts cated toward establishing a formal the projects being managed. should be alloVE program on

NOTE: The Value Analysis approach has application to many different types of problems. Reference Figure 16 the Life Cycle Cost and Value Analysis of Childless Marriages.

Sign up to vote on this title
UsefulNot useful