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Each person has an opinion regarding what affects the value of a product or service.

Often, decisions are made by one dominant individual, who bases the choice on just one criterion, such as cost, quality, or reliability. Decisions like these lead to less than optimal overall decisions.

Value Engineering (VE) is an effective technique for

reducing costs, increasing productivity, and improving quality.

Value Engineering (VE) was developed at General

Electric Corp. during World War II and is widely used in industry and government, particularly in areas such as defense, transportation, construction, and healthcare.

It can be applied to hardware and software,

development, production, and manufacturing, specifications, standards, contract requirements, facilities design and construction.
It may be successfully introduced at any point in the

life-cycle of products, systems, or procedures. VE is a technique directed toward analyzing the functions of an item or process to determine "best value," or the best relationship between worth and cost.

Value is defined as a fair return or equivalent in

goods, services, or money for something exchanged. Value is commonly represented by the relationship: Value Function + Quality/Cost where function is the specific work that a design/item must perform, quality is the owners or users needs, desires, and expectations and cost is the life cycle cost of the product.

VE is a balance between Function, Quality and Cost





Amount OF MONEY SPENT to produce or acquire an item


The Sale or Trade value of an item on the open market.

USE VALUE Use value or functional value is the perceived value of goods or services to a customer because the goods/services do what they are supposed to do in the way they do it. Thus a vacuum cleaner that cleans better than another has higher functional value - most customers would be willing to pay more for it

Esteem value is the value of goods or services according to

the status they afford to the buyer/user. Thus, many customers will pay more for a branded item of clothing because they want to 'wear the name' - they feel it gives them some status a non-branded item would not.

The quality that renders something desirable, useful, or

valuable, basically its same as value.

Lack of information.

Lack of ideas.
Temporary circumstances. Honest wrong beliefs. Habits and attitudes. Changes in owner requirements. Lack of communication and coordination. Outdated standards and specifications.

VE follows a structured thought process to evaluate options . Phase1
Gather Information



Phase 4

Phase 5

Phase 6


Phase 1: Information Gathering

Determine the true needs of the project. Areas of high cost or low worth are identified. Scope and constraints are defines. The team reviews and defines the current conditions

of the project and identifies the goals of the study.

Phase 2: Functional Analysis

The team defines the project functions.

The team reviews and analyzes these functions to

determine which need improvement, elimination, or creation to meet the projects goals.

Phase 3: Creativity
The team lists creative ideas generated from its review

of the project with the aim of obtaining a large number of ideas through brainstorming and association of creative proposals. The team employs creative techniques to identify other ways to perform the projects function(s).

Phase 4: Evaluation
Creative ideas are analyzed , and the team selects the

best ideas for further development. The team follows a structured evaluation process to select those ideas that offer the potential for value improvement while delivering the projects function(s) and considering performance requirements and resource limits.

Phase 5: Development
The team prepares alternative designs with capital and/or

life cycle cost comparisons of original designs and proposed alternatives. All recommendations are supplemented with written descriptions, sketches, basic design concepts, technical information and cost summaries. The team develops the selected ideas into alternatives (or proposals) with a sufficient level of documentation to allow decision makers to determine if the alternative should be implemented.

Phase 6: Presentation
The objective in this phase to present the VE study report to the decision-makers ,the report includes a statement of the follow-up necessary to ensure implementation ,the presentation may be in written form or both written and oral .


At project level, sustainability means balancing value, risk and waste within project parameters. Issues surrounding the use of land, types of materials and construction techniques, regeneration issues and community needs, are all considered.

How VE influences Sustainability ?

Identify & prioritize project values amongst

stakeholders. Generate innovative and creative solutions to improve issues such as energy use, air quality etc. Maximize system efficiency and alleviate consumption of natural resources Decrease both capital and life-cycle costs. Seeks best value for money spent. Ensures you do the Project Right (cost effective).

In a Nutshell
Value Engineering Helps Organizations In



What is a Contract?
Work being done between two or more parties should

always involve a mutually approved document or contract. This document usually covers:
Terms and Conditions of a specific job An inclusive and detailed scope of work A pricing breakdown A timeline or schedule for work to be completed Any exclusions that must be outlined; also part of the scope of


Why do we need Contracts?

Contracts are designed to protect and legally bind all

parties involved. They inform all involved parties of exactly what they are responsible for and in what time frame. They allow for progress evaluation and management. They outline what needs to be present in a finished product for all parties to be satisfied.

How do I make a Successful Contract?

A Contract should clearly state the project objectives.

Market and environmental conditions should be

acknowledged and outlined, if necessary. Contracts should be thoroughly reviewed by a legal department, normally a third party. Contracts should exclude anything that may otherwise be assumed to be part of a job assembly.
Contracts can be added to easily, they cannot be easily

inflated to cover work not originally estimated.

What will happen if my Contract is successful?

Any comprehensive contract will allow and aid in: Efficient management and allocation of risk management Maintaining and possibly undercutting existing timeframes and cost analysis Identifying key stumbling points and mitigating their effect before they become major problems Minimize schedule delays and maximize returns

How bad could it get?

BAD! Without clear definitions of responsibility,
Confusion can ensue and cause delays that may cascade into other parts

of a project Disagreements can get out of hand Costs can increase in both direct and indirect areas

Additional labor Additional material Missing windows of opportunity as normally coordinated with other contractors, creating more difficult (and expensive) working conditions

A Breach of Contract results when terms of a contract are neglected

or contradicted-more delays/termination of the contract usually follows

How can I Maximize my Contracts Effectiveness?

Open and constant communication between involved

parties will ensure that everyone is always on the same page

Who cares?
The end customer, (usually the owner or

representative of the owner), and contractor are the main people concerned with any Contract. Other interacting contractors Arbitrators/Legal representatives Project Managers and Site Supervisors Any additional party that may otherwise be described as a principle stakeholder

What are major types of Contracts?

Fixed price (or lump sum)

Time and Material

Time and Material not to exceed cost

Fixed Price Contracts

Financially beneficial to the customer as long as the

scope is well defined Provides the most room for the contractor to maximize profit Usually is most efficient by promoting coordination of a job ahead of time

Time & Material

Good for the customer when the scope of work is not

well defined Possesses more risk and not as much profit opportunity for the contractor
These types of jobs usually progress at a slower pace.

Time and Material-Not to Exceed

Similar to standard for of Time and Material, only with

an upper limit on total expenses

Historically, this upper limit is normally sought after by all

contracted parties Should only be used in situations where very little is known about the scope of work, while still adhering to a budget

What should a Contract contain?

An Acknowledgement of an Invitation to Bid

Acknowledgement of all reference material used for

the estimate of the job in question Proposal letter outlining the scope of work Any bond information General conditions and any special conditions Permits, Licenses, Reports, etc. Any change orders

Are there any additional types of Contracts?

Cost-plus not to exceed &shared savings

Cost-plus incentive
Fixed price with incentive fee Fixed price economic price adjustment Bonus-penalty

Have I learned anything?

10+ years of industry experience has shown that if a

possible problem or negative outcome can be thought of during the estimating phase, or even earlier-it should be accounted for in a contract or at least specifically excluded from any responsibility up front and in writing.

Project Cost Capital Estimating

A quantitative assessment of the likely costs of the

resources required to complete the scope of the project If the scope is not well defined, we are doomed to failure in the estimate!
Cost Estimate

Direct Cost

Indirect Cost





*Directs + Indirects = Total Base Estimate (TBE)

Front End Loading (FEL)

Risk & Uncertainty

FEL-1: Appraise
Unknown > 70 Known < 30

FEL-2: Optimize
Unknown > 65 Known < 35

FEL-3: Define
Unknown > 60 Known < 40

Unknown > 30 Known <70

Probabilistic VS Deterministic
Probabilistic Estimate A range of estimates In FEL-1 and FEL-2 stages Deterministic Estimate A single point estimate, one number In FEL-3 stage




Types of Estimate

Made without detailed engineering data Lang Factor: Equipment price = $10,000 and Lang Factor = 3.1 for Solid process plants, then Estimated total cost = $31,000


Engineering is 10% to 20% complete Used for initial budgeting


Engineering is 40% to 60% complete Used as a basis for awarding the contract


Very defined engineering data 50% + Used for Project Cost Control and Cost Monitoring

Why Do The Estimates Vary?

Level of scope definition Level of design details Availability of time

FEL Stages & Types of Estimate

FEL Stage Type of Estimate Level of Project Definition 1% to 3% Contingency Range* 20% to 40% Accuracy Range** -20% to +40%

FEL-1: Appraise


FEL-2: Optimize


3% to 5%

20% to 30%

-10% to +15%

FEL-3: Define


40% +


-10% to +10%

*For example, if in FEL-1 phase TBE is $10,000, then the Total Cost will be $14,000 @ 40% contingency) ** $14,000 - $2,800; $14,000 + $5,600 = > the real cost should be between $11,200 and $19,600

Probability Ranges
P(10) There is only 10% chance of project cost being equal to or less than estimate In FEL-1 stage P(50) There is 50% chance of project cost being equal to or less than estimate In FEL-2 stage P(90) There is 90% chance of project cost being equal to or less than estimate In FEL-3 stage

AACEI* Classes
Type of Estimate Conceptual Preliminary Detailed Definitive AACEI Class Class 5 Class 4 Class 3 Class 2 FEL Stage FEL-0 FEL-1 & FEL-2 FEL-3 Execute

* Association for the Advancement of Cost Engineering International


Who are these people

Responsibility Chart
Project Manager Engineer Manager Construction Manager Project Engineer Project Controls Manager Scheduler Procurement Manager

A/C Manager


Cost Control





* Bolded are directly communicating with the Contractor


Project Manager Project Control Manager

PM: Supervises and approves cost estimates. Controls Contingency. PCM: Prepares and supervises detailed estimates and presents them to the PM.


Estimator: Structures and prepares estimate.

Organizing for an Estimate

Historical data Professional references Market surveys Techniques Procedures Policies Practices



Past experience People skills Software use (Icarus, Timber line) Sanity checks

Schedule of activities Team preparation Buy in of all stakeholders


Clauses are like earmarks that are used when a bill is

passed by congress They include special rules within a major deal For example if bill is passed to build roads in Iowa and that bill has is an earmark that says that they also need to build a McDonalds on top of The Rocky Mountains for a politician that gets hunger when climbing.

Key Contract Clause


Contractors Responsibilities Delays Changed conditions Dispute Resolution Force Majeure Governing law

Key Contract Clause


Late Completion Damages Limitation of Liability No Damage for Delay Order of Precedence Owner Responsibilities Payments

Key Contract Clause

Quantity Variations

Suspension of Work Termination Time of Performance Warranty

This is when you request extra money due to an

occurrence Usually there are a certain amounts of claims in a contract. There will be a clauses that states it if there is. This is called an Universe of Claim

Types of Claims
Direct Changes

Constructive Changes by the owner

Differing site condition Suspension of Work Constructive suspension of work by the owner Force Majeure

Types of Claims

Acceleration by the owner

Constructive Acceleration by the owner Termination for Convenience by the owner Termination for default by the owner

Solving Disputes
Negotiation: this is the best and fastest way to handle a

dispute Mediation: Here you have another person of group that helps negotiate Arbitration: This is when you present your evidence and a final decision is made without any negation after the final decision. Litigation: Is when you file a lawsuit

The End