FACULTY OF ENGINEERING & BUILT ENVIRONMENT

DEPARTMENT OF CONSTRUCTION MANAGEMENT &

QUANTITY SURVEYING

CONSTRUCTION ECONOMICS
Value Management
 INTRODUCTION

CONCEPT OF VALUE
In value management the concept of value the concept of Value is based on the relationship
between satisfying needs and objectives and the resources required to achieve them. The
fewer the amount of resources used, the greater the value. At the same time, many different
stakeholders, including internal and external customers, may have different perceptions of
what constitutes value. The goal of value management is to balance these differences and
enable an organisation to achieve maximum progress toward its stated goals with the
minimum use of resources.

Value can be added to projects in several ways. These include maintaining acceptable levels
of satisfaction while lowering resource expenditures, or some combination of the two. It is
also possible to improve value by simultaneously increasing satisfaction and resources,
provided that satisfaction increases more than the resources used.

When managing projects for value, five fundamental concepts must be embraced. These
concepts are:

Concept #1: Projects derive their value from the benefits the organisation accrues by
achieving its stated goals — Remember that projects are typically initiated as a perceived
solution to a goal, need, or opportunity. Thus, when we want to determine the degree to
which a project is being managed for ‘‘value,’’ it is critical to first ensure that the project falls
in line with organisational goals. Projects that are being run counter to a firm’s stated goals
already fail the first test of value.

Concept #2: Projects can be viewed as investments made by management — Any

investment comes with an expected return for the risk undertaken, and projects are no
exception. Because they consume resources and time, they are expected to yield acceptable
returns, based on internal requirements, along with associated benefits.

Concept #3: Project investors and sponsors tolerate risk — There are inherent risks in
projects, because there is considerable uncertainty surrounding their outcomes. These risks
may be technical (‘‘Does the technology that is driving the project work?’’), they may be
commercial (‘‘Will the project succeed in the marketplace?’’), they may involve health and
safety issues (‘‘Can we manage the project within appropriate safety parameters?’’), or some
combination of all of the above. Accepting these risks is recognition that each project is a
unique endeavour with unique unknowns. Investors may not be able to manage these risks,
but they do tolerate them because the potential rewards may far outweigh the negative
impact.

Concept #4: Project value is related to investment and risks — This fourth concept defines
project value as a function of the resources committed (investment made) and the extent of
risks taken. Project value is delivered from resources committed and risks taken. Using these
terms, we can see that value will always walk a narrow line between expected return on
investment and risk. When the perceptions of the organisation are that the expected return
cannot make up for excessive levels of risk, the project ceases to produce value. The
implication of this concept is that different projects require different levels of investment with
varying levels of risk. Consequently, the value delivered by each of these projects will also
vary.

Concept #5: Value is a balance among the three key project elements: performance,
resource usage, and risk — Again, if we employ a ‘‘ledger’’ mind-set, we can add up the
credit column to include drawbacks such as expenditure (resource usage) and risk accepted.
Balanced against these ‘‘negatives’’ is the company’s expectation of project performance and
positive outcomes. Naturally, the higher the expected performance of the project, the greater
the resource usage and risk a company is willing to commit.

MEASURES OF VALUE
It is apparent that value is a multidimensional concept that can be viewed from many
different perspectives. How an organisation chooses to measure value must correlate with
preferred goals, available data, and meaningful metrics. For example, considerations of the
quality dimension of value can include the project’s conformance to standards, its
functionality and fitness for use, its availability, and its responsiveness to the context and the
environment.

For most construction organisations, the objective measure of value is in monetary terms.
This is because projects consume time, and the longer it takes to complete the project, the
less valuable the money spent. Therefore, when evaluating a project’s value, the concept of
the time value of money should be taken into account. In addition, monetary measures allow
project managers to acknowledge the future uncertainty of outcomes by evaluating the
financial impact of risk events.
OVERVIEW OF VALUE MANAGEMENT
The value management process originated during World War II within the General Electric
Company (GEC) in the USA. GEC was faced with an increase in demand but had a shortage
of key materials. Larry Miles of GEC, instead of asking ‘how can we find alternative
materials’, asked ‘what function does this component perform and how else can we perform
that function?’ This innovative approach led the company to use substituted materials for
many of its products. They found, surprisingly, that the cost of the product was often reduced
but the product improved; care and attention to function provided better value for money.

Definition of Value Management

Value Management has been defined in other number of ways such as:

Kelly and Male (1991) define Value Management as an oriented effort to attain optimum
value in product, system or services by providing the necessary functions at the lowest cost.

“Value Management is a rigorous, systematic effort to improve the value and optimize the
cost of project, facilities and system. Value Management generates these cost improvements
without sacrificing the needed performance levels. It is a creative way of working together in
achieving client and stakeholder’s requirements.”

Australia’s Department of Defence, defines Value Management as “the systematic effort

directed at identifying the functions of systems, equipment, facilities, procedures and supplies
for the purpose of achieving the essential functions at the lowest cost consistent with the
needed purpose, performance, reliability and maintainability.”

Key Attributes of Value Management

Value management is an important part of the overall project management, it requires us to
simultaneously consider perspectives that are technical, strategic, and behavioural. These
attributes include the following:

1. Management Style
 Emphasis on teamwork and communication
 An atmosphere that encourages creativity and innovation
 Focus on customer requirements
 Evaluate options qualitatively to enable robust comparisons of options

2. Positive Human Dynamics

 Encourage people to work together toward a common solution
  Bring people together by improving communication between them
 Foster better common understanding and provide better group decision
support
 Challenge the status quo to bring about beneficial change
 Assume ownership of the outcomes of value management activities by those
responsible for implementing them

3. Consideration of External and Internal Environment

 Take into account pre-existing conditions external to the organisation over
which managers may have little influence
 Consider internal conditions that managers may or may not be able to
influence
 Understand degrees of freedom—the external and internal conditions will
dictate the limits of potential outcomes and should be quantified

VALUE MANAGEMENT TERMS

Value management refers to the full range of value techniques available, several of which are
described in this section. In the past two decades, there has been an increasing trend toward
applying these techniques at the earlier stages of a project’s life cycle.

Value planning (VP) is a value study that occurs during the early design or development
stages of a project life cycle, before a preferred alternative is selected. Value planning
typically focuses on identifying project objectives and developing functional components and
general approaches to meeting those objectives. It ensures that value is planned into the
project from its inception by addressing and ranking stakeholders’ requirements in order of
importance. This makes it extremely important for project team members to know who those
stakeholders are. Value planning should be used for most projects.

Value engineering (VE) is the title given to value techniques applied during the design or
engineering phases of a project. This value study is conducted after the design alternatives
have been developed, and perhaps before a preferred alternative has been selected. Because
more information about the project becomes available as the project design process
progresses, VE studies are much more detailed than VP studies. Value engineering employs
many techniques that focus on quantifying and comparing—it investigates, analyses,
compares, and selects among various options that will meet the value requirements of
stakeholders.
Value engineering is also a useful technique for assessing costs and benefits during each
phase of a project. It can be used to determine if there is a more cost-effective way to obtain
the desired result, which can have a significant impact during a project’s design phase.

Value analysis (VA) refers to value techniques that are applied retrospectively. Value
analysis analyses or audits a project’s performance by comparing a completed, or nearly
completed, design or project against predetermined objectives. Value analysis studies are
normally conducted during the post-manufacture/construction period, when a project is fully
operational. In addition, the term ‘‘VA’’ can be applied to the analysis of non-
manufacture/construction-related procedures and processes, such as studies of organisational
structure, or procurement procedures.

The major emphasis of value planning, value analysis, and value engineering methodologies
is to focus on value by improving existing products or developing better ones.

NEED FOR VALUE MANAGEMENT IN PROJECTS

There are a number of reasons to use VM.
1. The projects often suffer from poor definition due to inadequate time and thought
given at the earliest stages. The effect is seen in cost and time overruns, claims, long-
term user dissatisfaction, and excessive operating costs. Value management combats
this by forcing organisations to identify the need for, and scope of, any project at the
earliest possible stage.
2. There are almost always elements that contribute to poor project value, including
inadequate time availability, inactivity, lack of or poor communications, attitudes and
influences of stakeholders, outdated standards or specifications, lack of work
coordination, absence of state-of-the-art technology, and so on. Value management
and its associated methodologies consciously attempt to eliminate these problems by
developing an understanding of the VM processes in all project participants.
3. VM aims to maximize project value within time and cost constraints, without any
adverse impact on performance, reliability, or quality.
4. VM is structured, auditable, and accountable.
5. It is multidisciplinary, seeking to maximize the creative potential of all departmental
and project participants working together.

THE VM PROCESS
The VM study process is defined by the VM workshop. Due to the nature of the activities
involved, this usually takes two days.
 1. The Information Phase
Pre-workshop
The information phase starts before the workshop and includes the logistics and selection of
participants and the preparation of required background material. The background material
include the perspectives of all the stakeholders. Function and performance requirements are
identified and associated cost data are gathered.

Tasks undertaken in this stage include:

 Assess available information;
 Clarify project objectives, explicitly stated and ranked in order of priority;
 Clarify the scope including the limits of the study;
 Finalise the participants and timing;
 Ensure venue and facilities are appropriate;
 Identify the issues of concern;
 Prepare a briefing information pack for the participants;
 Notify and brief presenters.

Workshop
At the workshop, the information phase continues. The project time, cost and performance
requirements, the study objectives, and the issues of concern are presented to the study
participants and discussed. Any assumptions are listed and challenged. The problem situation
is defined and the study scope and objectives confirmed.

Tasks undertaken in this stage include:

 General introduction including introduction of each participant;
 Overview of the intended Value Management and workshop process;
 Outline of the project and the reasons for it;
 Define the project givens, requirements and assumptions;
 Presentations on the background, issues and concerns;
 Clarify the problem situation and the key issues;
 Confirm the project objectives, phrase as measures of success and prioritise;
 Confirm Value Management study objectives.

2. The Functional Analysis Phase

A function-based analysis is the key to the value management exercise. Where appropriate
data exists, the costs associated with functions are added and the most likely opportunities are
targeted for closer analysis.
Function Analysis involves clearly identifying what things actually do, or what they must do
to achieve the project objectives. Through the analysis of functions, it is possible to identify
the wastage, duplication and unnecessary expenditure thus providing the opportunity for
value to be improved.

Tasks undertaken in this stage include:

 Identify the required functions;
 Represent the functions diagrammatically using a Function Analysis System
Technique (FAST) diagram or by grouping functions and representing them as a
cluster diagram or a tree diagram;
 Assess the cost of functions where possible and identify target functions on the basis
of their benefit/cost ratio.

3. The Ideas / Options or Creativity Phase

Starting with the targets identified in the previous phase, functions are examined using a
range of brainstorming and creative thinking techniques. Options are generated for providing
the functions at lower cost without compromising quality, environmental requirements and
performance criteria. As is typical in this type of brainstorming, ideas are not judged in this
phase.
The study team is often divided into groups for most of this phase, with each group
concentrating on a different area or set of issues. Each group presents its options to the others
and further options are sought from the entire group.

4. The Evaluation or Judgement Phase

The complete list of options, which can run to several hundred, is evaluated for cost
effectiveness and practicality.
Tasks undertaken in this stage include:
 Clarify and assess the options generated;
 Rank options as:
 A – Adopt;
 B – Real opportunity;
 C – Unlikely;
 D – Discard.
 Group the ‘A’ and ‘B’ options into coordinated alternative solutions;
 Where a ‘C’ option supports the other options, include it in the alternative solution.
 5. The Development Phase
Solution Development
In this phase, the study team is again divided into groups. Each group evaluates an alternative
solution or options within a potential solution. The groups assess the options that were ranked
most positively (‘A’ and ‘B’), and then refine, detail and develop the options as part of their
solution. Costs, risks, cost savings and other key benefits are assigned to the options.

The groups present alternative solutions to the other participants and the study team assesses
the options. The risks associated with each of the selected options are identified. The risk
register is reviewed and a revised risk profile is assessed. If additional treatment is required to
reduce risks to an acceptable level, the cost of the treatment is included with the option. If
necessary, techniques such as paired comparisons are used to arrive at a final preferred
option. The end result is a list of recommended options with associated costs and benefits.

Where a lack of information prevents full development of an option, the investigation

required to address the issue will be defined and recommended as part of the solution.

Post-Workshop Development
Selected options identified during the workshop are developed and action plans are
implemented. Members of the study team are assigned to undertake this work.

Implementation of the agreed options is integrated into the project management processes to
upgrade the project plan and deliver enhanced value.

BENEFITS OF VALUE MANAGEMENT

If properly organised and executed, VM will help stakeholders achieve value for their money
by striking the desired balance between cost and functional performance. This, in turn,
delivers the optimum solution for project stakeholders. Value management achieves this
result by ensuring that the need for a project is always verified and supported by data, and
that project objectives are openly discussed and clearly identified.

The key to effective VM is to involve all appropriate stakeholders in the process of structured
team thinking, so that the needs of the main parties can be accommodated wherever possible.
In fact, VM primarily depends on whether or not stakeholders can agree on the project
objectives from the start. Consequently, project design evolves from an agreed-upon
framework of project objectives, and the outlined design proposals are carefully evaluated
and selected on the basis of well-defined performance criteria.