value managementbokcms.appa.org/pdfs/53-07312012.pdf · figure 2. 90/10 rule value management...

Value Management

Steven Thweatt

Value Management Copyright APPA 2020

Published by APPA:APPA is the association of choice serving educational facilities professionals. APPA'smission is to support educational excellence with quality leadership and professional

management through education, research, and recognition.

Reprint Statement:Except as permitted under copyright law, no part of this chapter may be reproduced, storedin a retrieval system, distributed, or transmitted in any form or by any means - electronic,mechanical, photocopying, recording, or otherwise - without the prior written permission of

APPA.

From APPA Body of Knowledge APPA: Leadership in Educational Facilities, Alexandria, Virginia

This BOK is constantly being updated. For the latest version of this chapter, please visitwww.appa.org/BOK .

APPA1643 Prince Street

Alexandria, Virginia 22314-2818www.appa.org

Copyright © 2020 by APPA. All rights reserved.


http://www.appa.org

Value Management

Introduction

Value management is a concept that embraces the design of facilities while balancingappropriate but sometimes competing program, quality, performance, and costrequirements. For an institution to realize the best overall value for its capital investment innew or renovated facilities, the total cost of ownership must be considered continuouslythroughout the design process. Making good decisions related to true value during designdoes not happen without a focused effort; but rather is the result of procedures introducedin the process that ensure its consideration and implementation.

This chapter will cover (1) designing for maintainability, (2) the evaluation of designs usinglife-cycle cost techniques and value management review processes, (3) the use oforganized project design reviews, and (4) the development of a facilities maintenanceimpact statement. Although many needs compete for inclusion in all capital projects, along-term view of capital assets represents a continuing investment in education facilities.Without the utilization of a value management process, the long-term view is oftenneglected and those assets are jeopardized.

Integrated Value Analysis

In addition to facilities, the design process, along with the facilities themselves, hascontinued to increase in complexity, with many factors influencing that process. Coupledwith these complexities is an ever-increasing awareness of the built environment and theneed to conserve all natural resources. Sustainability has become a focus for many areas offacility development, including the design process. The continuous development of newproducts and the ability to store and retrieve data also give the designer more alternativesand information to consider for design solutions. The overlapping of these often-competingneeds with the various professional disciplines involved in the ever-expanding design teamrequires even greater coordination and evaluation during the entire design process.

Figure 1 illustrates the fact that the owner's requirements and the architectural disciplinehave the greatest impact on the cost. The figure also shows the significance of earlydecision making on a project's cost and how each discipline overlaps the others. Significantsavings typically occur earlier in the process and in the overlapping areas. The owner'srequirements may not fit the budget, or if one discipline dominates the design input, thenthe design will be out of balance and may not provide an optimal solution.


Note: Figure based on typical office building. Impact will vary by type of structure.

Source: Dell'Isola, Alphonse J. Value Engineering in the Construction Industry, third edition.New York: Van Nostrand Reinhold, 1988.

Figure 1. Decision Makers' Impact on Total Building Costs

Management is not something that occurs late in the design process when budget issuesbegin to appear; rather it is something that must be an integral part of the process fromthe beginning. To that end, there is no more important time for decision making on aproject than the beginning. Decisions that are made in the early stages of a project havethe greatest impact on the outcome of a project and must be carefully considered. Figure 2appropriately illustrates this with the 90/10 rule, which states that “decisions made duringthe first 10 percent of a project’s effort determine 90 percent of a project’s outcome,particularly as it relates to cost and schedule.”?


Figure 2. 90/10 Rule

Value Management Strategies

Both life-cycle cost and value management methodologies have proven to be invaluabletools for making cost-effective decisions throughout the entire design process. Ownersincreasingly are concerned about the continuing costs of ownership as energy and laborcosts continue to escalate. The use of new materials and systems in building designs oftenresults in new maintenance problems for the facilities organization. Therefore, a statementof maintenance impact is useful in the complex economic evaluation of the building project.

Designers are faced with an array of complex decisions during the process of designing abuilding. They must deal with issues ranging from space and program requirements,functional adjacencies and relationships, site context, budget constraints, schedules,regulations, material and systems selections, and aesthetics and then must put it alltogether into a satisfactorily executed project. The final solution may satisfy some of therequirements of a project, but it rarely satisfies all of them, primarily because of budgetaryconstraints. Programmatic needs may be met and initial costs may be contained within thebudget, but the total cost of ownership is often neglected in the process. In designingfacilities for maintainability, the owner should prepare a maintenance profile, including thebudgets for staffing, energy, building systems upkeep, and replacement costs.

As described in the definitions, the total cost of ownership (TCO) is the dollar per squarefoot value associated with a facility. It is a calculation of all facilities-specific costs (notincluding furnishings or nonfacility-specific equipment) divided by the estimated life span ofthe building (30 or 50 years), and then divided by the total gross area.

Over the life of a building, the original capital costs and the maintenance and operationalcosts are almost equal, but when recapitalization costs are added to the TCO, the final costof owning and operating a facility often exceeds its initial cost. This comparison isarticulated in a recent CFaR2 study titled "Buildings, the Gifts That Keep on Taking."

When the building is occupied by a high-energy user, such as a research laboratory,


http://www.appa.org/files/pdfs/buildings%20exec%20summary.pdf

When the building is occupied by a high-energy user, such as a research laboratory,building systems should be designed for minimum energy demand. If the occupancydemands flexibility, then systems should be selected for minimum energy use coupled withminimum cost to change the functional use in the future. Systems should be designedrespecting the class of operating personnel and philosophy of the owner. Today’ssophisticated mechanical systems can produce some highly efficient building systems, yetwithout the ability to properly maintain them, their value and effectiveness is diminished. Iffunds are difficult to obtain for replacement costs and regular maintenance, then materialsand systems must be selected with a focus for long life and minimum regular care. Thismeans that balance must be achieved between initial costs and continuing maintenancecosts.

To design an economically balanced project, the designer must make decisions early in thedesign process to be the most cost-effective. Value management and life-cycle costmethodologies will assist the designer and owner in making cost-effective decisions formaintainability as well as design quality.

Value Management Reviews

Value management is a creative, function-oriented, organized approach to optimizing thetotal cost and performance of a facility or service. Value management is rooted in the moretraditional value engineering approach to project budgeting and review, yet valueengineering has been used more as a cost-cutting tool for projects that are in financialtrouble than as a good decision-making tool (its intended use).

Value engineering should be performed by the entire project team supplemented byspecialty consultants not associated with the design team. The practice draws on theindividual viewpoints, experience, and knowledge of its members. The review should be ledby a certified value specialist and follow a "job plan" of specific steps: informationgathering, functional analysis, speculation (creativity), analysis (judging), development,and presentation. Value engineering is a systematic process relying on the use of analysisconcepts and techniques that identify and analyze the function of the project componentsand systems. Creative techniques, especially brainstorming, are used to identify andconsider various alternatives. The value management process embraces value engineeringprinciples to ensure that the appropriate people are involved in the evaluation anddecision-making process. As explained with the 90 /10 rule, value engineering is mosteffective during the early stages of design, because the ideas are still conceptual, and theowner and the designer can be flexible with their decisions without incurring delays in theproject schedule.

Value engineering tools and methodology are appropriate for any project. They produceoptimal results in layout, structural bay sizing, floor-to-floor height, exterior closure,finishes, mechanical and electrical systems, day lighting, furnishings, net-to-gross floorareas, systems integration, roofing systems, energy conservation, and constructability.Value engineering techniques are also useful in deciding whether to renovate, expand,replace, substitute, or eliminate present facilities. Project cost information is organized in acost model following the UniFormat system, as illustrated in Figure 3. The cost modelindicates that architectural and mechanical areas offer the best potential for savings andshould be the subject of in-depth studies.


http://en.wikipedia.org/wiki/Value_engineering

http://www.csinet.org/uniformat

Source: Dell'Isola, Alphonse J., and Stephen J. Kirk. Life Cycle Costing for DesignProfessionals. New York: McGraw-Hill, 1981.

Figure 3. Cost Model

Evaluation of the alternatives during the analytical phase of the value engineering job planis accomplished using the weighted evaluation form illustrated in figure 4. Each criterion iscompared against the others and evaluated as to which has preference and to what degree.This results in weighted criteria against which each alternative is judged. The alternativereceiving the highest score is the preferred solution at this time in the value engineeringprocess.



Figure 4. Weighted Evaluation


Using value engineering, design professionals identify required functions, developalternatives, and select the most long-term cost-effective solution, thereby better satisfyingoverall project requirements and achieving functional performance, while ensuring thatowners receive the optimal return on investment. Value engineering, when appliedcorrectly, results in optimal cost and design excellence. Value engineering invariablyproduces savings that greatly exceed the cost of the process itself. The ratios varyaccording to the job and the areas of work, but savings in a ratio of 2:1 are routine, and20:1 is not uncommon. As a rule of thumb, value engineering should identify savings of 5to l0 percent of total project costs, while the typical cost of value engineering is 0.2 to 0.5percent of the construction cost.

Value management takes the value engineering process and ensures that the right peopleare involved in the entire process. For example, studies should be conducted through theleadership of a certified value specialist with extensive experience in this type of work. Akey to developing meaningful proposals is to use an experienced multidisciplinary team thatwas not involved in the original decisions to supplement the project team efforts. Thisapproach brings to the process an objective design appraisal that can significantly improvemany traditional designs.

The primary business of some consulting firms is to perform value engineering studies inaddition to conducting value engineering training. If the institution is actively involved inprojects of significant size, or in significant numbers of projects, it may be desirable tohave a value engineering officer on staff. As an alternative to a permanent staff person,however, open-ended contracts with a consulting firm are used for an established valueengineering program. It is equally important to have the facilities staff, project manager,design team, prospective occupant, and other affected stakeholders represented in thevalue management process.

Value engineering is only one of the tools available in the value management process andshould not be used to simply reduce costs. Although it usually identifies opportunities forsavings, it should be performed as a part of the overall value management strategy toensure the best value by identifying unnecessary costs or wasteful expenditures.

Life-Cycle Cost Review

As value engineering identifies alternatives for better value, the methodology of analysisincludes economic assessment, considering all the significant costs of ownership over aneconomic life expressed in equivalent dollars. Significant costs of ownership include initialcosts, financing, operational (energy), maintenance, alterations and replacement, taxelements, and salvage value. To assess the economic value of the alternatives, all costs arebrought back to a baseline to develop equivalent costs, and the project life and discountrate (borrowing rate) are established using proper economic procedures.

To reduce time and complexity in using life-cycle cost methodology, the elements that willbe the same in any of the options are identified and removed or fixed during the analysis.The significant costs associated with each alternative are isolated and grouped by year, ortime spans, appropriate for the user. All costs are converted to current dollars bypresent-worth calculations, using a reasonable discount factor. This is done because a costincurred in the twentieth year or the fifth year is not the same present value as oneincurred in the first year.

Decisions made early in a project have the greatest impact on the cost of construction andconversely are the most important in terms of savings potential (the 90/10 rule). It isequally important to focus on the appropriate level of decision making to ensure that thegreatest impact is realized. For example, the selection of a major building system type,such as heating, ventilation, and air conditioning (HVAC), is more important than selectingthe specific manufacturer of the equipment. A decision made late in the design process withregard to systems type has increasing cost implications, and savings naturally will bereduced. The major impact of life-cycle cost occurs in concept, schematics, and, to a lesser


http://www.value-eng.org/about.php

http://en.wikipedia.org/wiki/Whole-life_cost

degree, design development.

Life-cycle cost can also be used during the predesign phase to help determine projectfeasibility. It has been shown that $1 saved from operating costs through better planningor design is equivalent to a $10 to $12 reduction in construction costs. It is often easier totake $1 out of operating costs than construction, and considering that the savingspotentially can be multiplied by 10 or 12, life-cycle costs are more important than projectconstruction costs. Figure 5 graphically illustrates the comparative costs associated witheach building system. This helps to identify the areas that are high in cost and the systemswhere continuing costs are a major portion of the life-cycle cost.



Figure 5. Life-Cycle Cost Distribution, Present Worth, for a Typical Office Building

As shown in Figure 6, life-cycle costs are evaluated in tabular form, including initial costs,replacement and salvage costs, and annual costs in present value. This procedure providesa comparative analysis between alternatives to the original system design. Figure 6illustrates the life-cycle cost of an HVAC system. The initial costs are made up of theequipment, related electrical cost, and owner-supplied equipment. The salvage andreplacement costs show the equipment replacement cost required by each alternative andthe salvage value for each. The annual cost portion of the life-cycle cost includesmaintenance and operation costs for each alternative. Other annual costs include licenses,permits, and insurance. All these costs are then added for a total life-cycle cost for eachalternative.



Figure 6. Life-Cycle Costing of HVAC System

Present and future costs are brought to a common point in time. Two methods are used inlife-cycle cost. Costs are converted to current cost (present worth or net present value) orconverted to annual payments (annualized). Either method makes it possible to comparethe economics of alternatives. Life Cycle Costing for Design Professionals, by AlphonseDell'Isola and Stephen Kirk, is an excellent source for life-cycle cost economic methodology.


For a discussion of Net Present Value (NPV), see the chapter in Part 1 on financial analysis.In value decisions, however, one common mistake in using NPV is using incremental,marginal NPV results to determine whether it is appropriate to make a marginal investmentin the next level of a mutually exclusive alternative. In some circumstances, the resultingNPV calculation can tempt the evaluator to prematurely halt their effort and not fullyexplore the NPV relationship with the base alternative and a seemingly more expensivealternative. When an investment decision is mutually exclusive, it means that you foregoone or more choices if you select another. For example, selecting one specific type of roofis a decision that is fundamentally independent of the type of window that you might select,and therefore the choices surrounding these two independent building systems are notmutually exclusive. However, a choice related to the thickness (or R-value) of insulation (1inch, 2 inches, or 3 inches) on the roof is an example of a mutually exclusive choice. Ifyou select 1-inch insulation, you have foregone a decision on 2- or 3-inch insulation. Theproblem with using only the NPV calculation to decide which is the best insulation thickness(or on any mutually exclusive decision) is that the “marginal” present value does notalways lead to the best answer. Going back to the roof insulation example, the marginalNPV improvement of going from 1- to 2-inch insulation may dictate going ahead anddesigning the roof system for 2-inch insulation without any further examination. This isbecause the labor cost to install the insulation is about the same for any thickness, but thegain in energy efficiency is far greater than the added costs of the materials. If you thencheck to see whether it makes sense to go from 2 inches to 3 inches using NPV, you mayfind that it is not a good decision when, in reality, the NPV of going directly from 1 inch to3 inches has the best NPV. Thus, on mutually exclusive choices, it is always important tocalculate NPV against the original choice, not against other mutually exclusive choices.

Contractor Review

Review of any design by a construction contractor can add innumerable benefits to anybuilding project. The constructability of a particular design will have a profound impact onthe cost and the time required to build the facility. Evaluation of the proposed buildingsystems can be a valuable contribution during the design process. However, the experienceand expertise of contractors will determine the actual value of their review.

The review should occur early in the design to provide the greatest benefit, and making it apart of the value management process will yield the greatest results. If it is a part of thevalue engineering study, project issues related to ease of construction would be evaluatedalong with other affected disciplines. Some common project delivery approaches, such as Construction Management and Integrated Project Delivery, encourage this type of earlyinvolvement by the contractor as a natural by-product of their processes and are used asone of the cornerstones for their use.

Some government agencies that must operate in a publicly competitive bid environmentinclude in their construction contracts a prescribed procedure for providing savings duringconstruction. This process is sometimes called a value engineering change proposal and asdescribed in chapter six of the Value Engineering Program Guide for Design andConstruction. It gives the contractor on public works projects the opportunity to offeralternatives for better value that will produce savings in project cost. This opportunity isimportant because many public works projects prohibit contractors from working with theagency before the award of the bids for technical and professional advice. This approachoften includes an incentive for the contractor by sharing the savings with the owner.Although this alternative approach provides opportunities to engage in the valuemanagement process in a public environment, this type of review is most successful whenthe contractor is a member of the team from the start of the project.

Maintenance Impact Statement


http://en.wikipedia.org/wiki/Construction_management

http://www.aia.org/

http://images.autodesk.com/adsk/files/ipd_definition_doc_final_with_supplemental_info.pdf

http://www.dla.mil/Portals/104/Documents/Aviation/AviationEngineering/Engineering/AV_RE_GuidelinesForContractors_110500.pdf

http://www.gsa.gov/graphics/pbs/New_VEPG_Volume_I_R2Q-iK_0Z5RDZ-i34K-pR.pdf

http://www.gsa.gov/graphics/pbs/New_VEPG_Volume_I_R2Q-iK_0Z5RDZ-i34K-pR.pdf

A maintenance impact statement can be a valuable part of the total evaluation of thefacility design. The statement should be made in terms of maintenance recommendationsfor equipment and annual operating costs. The costs are then converted to present-valuedollars for life-cycle evaluation. The evaluation criteria should include the following:

Staffing and material costs for system operation and maintenanceStaffing and material costs for building upkeep and maintenanceReplacement costs and life of equipment and building systemsAnnual energy consumption

Maintenance information can be found in various forms, but one source has compiled theinformation in a format for use with value engineering and life-cycle cost forms. A sampleof this information is illustrated in Figures 7 and 8. The form is organized in sevencategories: structural, architectural, mechanical, electrical, equipment, site, and other.Each element is identified by its UniFormat code number. Data are provided for annualmaintenance cost (labor, material equipment), energy demand, replacement life in years,and percentage replaced.


http://www.csinet.org/uniformat


Figure 7. Life-Cycle Data, Floor Finishes


Source: Alphonse, J., and Stephen J. Kirk. Life Cycle Cost Data. New York: McGraw-Hill,1983.

Figure 8. Life-Cycle Data, Air Handling Equipment

These forms identify unit of measure of maintenance and describe the maintenanceperformed. The institution's historical information could be substituted for the data. Thisinformation typically is included in life-cycle cost evaluations as a part of the valueengineering project study. Therefore, if value engineering is included in the design process,the statement is made as a part of the proposed alternatives.

Summary

To receive the best value in the design process, institutions should incorporate the provenmethodologies of value management through appropriate value engineering principles andlife-cycle costing as a part of the early phases of design. The issues related to themaintenance and operation of facilities must be part of the overall cost considerations anda necessary part of the program requirements to ensure its consideration in the designprocess. The minor additional expense will be returned many times in the economics of thetotal cost of ownership. An economic survey of a typical office building illustrated in Figure9 shows the dramatic results of a small reduction in the construction cost and operationcost over the life of the project. The return on investment in this example increased from18.1 percent to 30.2 percent.


Source: The Smith Group Building Cost Index. "Economics to Optimize ROI during ProjectDesign." Fourth Quarter. 1983.

Figure 9. Hypothetical Office Building Economic Survey

References

Other ResourcesDell'Isola, Alphonse, and Stephen J. Kirk. 1981. Life Cycle Costing for Design Professionals. New York: McGraw-Hill. This

book describes procedures for the designer to use in evaluating various energy and other life-cycle ideas with respect to economicsand other noneconomic criteria. It leads the designer through each step of the analysis.

Dell'Isola, Alphonse J. 1988. Value Engineering in the Construction Industry. 3rd ed. New York: Van Nostrand Reinhold. Thisthird edition demonstrates how to use advanced value engineering techniques to isolate, control, and reduce costs on all aspects ofdesign and construction.

Kirk, Stephen J., and Kent F. Spreckelmeyer. 1993. Enhancing Value in Design Decisions. New York: Van Nostrand Reinhold.This book provides the design professional with a systematized framework that will enhance decision-making skills. The process inthis book addresses a wide range of design concerns, including cost, energy use, aesthetics, and behavioral factors, whileconsidering the viewpoints of owners, users, builders, building managers, and the community.

The Smith Group Building Cost Index. "Economics to Optimize ROI During Project Design." Fourth Quarter. Washington DC,1983.

Notes

1. Dell'lsola, Alphonse J. 1988.Value Engineering in the Construction Industry. 3rd ed. NewYork: Van Nostrand Reinhold. The third edition demonstrates how to use advanced valueengineering techniques to isolate, control, and reduce costs on all aspects of design andconstruction.

2. The Center for Facilities Research (CFaR) was established in 2002 by APPA to organizeand consolidate research in facilities management issues.
