Five Golden Rules of Value Management 2

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Wednesday, February 11th, 2015
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Most construction professionals have undertaken a value management workshop.

For some it means putting their design intent on the chopping block, for others it means having their profit and overheads critiqued and for those normally driving it, it’s about reaching a number (ironically) at any cost.

As a seasoned quantity surveyor, I’ve seen my fair share of budget problems arising from issues such as contaminated ground, HV electrical upgrades and boundary disputes all the way through to the $20,000 reception couch the client can’t afford. There are generally two constraints:

  1. The propensity of project team members to shift blame for the unforeseen cost
  2. A focus on the problem and perceived injustices rather than proactively finding solutions to offset the unforeseen. And so, as the client and their team eventually get over the initial upset, value management takes centre stage

My frustration is borne from these constraints and upon reflection of various value management approaches which have failed to meet muster and achieve their primary objective. It’s an important point to make: value management does not mean lowest cost, but rather achieving optimal efficiency from investment of capital for the desired outcome.

If you work to these five golden rules, you’ll save yourself and your team a lot of time and debate:

1. Take a Budget Devolution Approach

Value management (VM) can be confronting. Often it is a response to a budget issue in latter stages of design after an extensive amount of effort has already been expended by the client and the consultant team. The feeling of injustice in this situation can understandably place the team at odds – most often – with the quantity surveyor whose primary role is to maintain the budget. From this position, many VM workshops are treated as a cursory preamble to design decimation.

To avoid animosity (and potentially avoid the need for VM) it is essential to recognise that each member of the team and the client, should own components of the overall budget. Quantity surveyors do not originate costs of a project but simply reconcile the cost of a given design solution.

Collective ownership of the budget is critical to achieving an on-budget result. Under a devolved-budget approach, each member of the team is empowered with control and autonomy of their budget component. Engaging the client and team in this way approach places responsibility on those who originate the design and design requirements to make decisions in a cost-informed way.

In my experience, architects in particular value the ability to invest in key design components (such as façade features or entry way finishes) while consciously balancing this expenditure elsewhere (such as paring back finishes to non-essential areas) in order to maintain the overall ‘architecture budget’ whilst being true to design intent.

2. Your First Conversation Should Not be About Cost

Assuming that cost issues have arisen, central to the VM process is first assessing the value, not cost. This is often the hardest aspect to get the project team to recognise. Whilst the issue is with cost, it should always be placed in context of the client’s goals. Deriving a clear understanding of what will deliver value to the client (or their organisation) is central to success.

A property developer’s value may be achievement of 100 per cent pre-sales, completion on time and maximised profit margin. None of these outcomes are predicated on lowest cost. Investment in an iconic design or more expensive finishes may in actual fact place a given development in a better position to realise the developer’s investment goals.

As this example demonstrates, it is important that each project is considered in its own right and context. Driving the discussion of value should also not be the reserve of high-level considerations. Each and every VM option should be scrutinised in relation to its contribution to the project’s value.

3. Look at the Cascade

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Unfortunately (as many architects nod their heads) the first port of call on the VM journey is finishes. In reality, this happens because it’s the one thing that everyone in the team understands, and yet the potential VM outcome is very limited.

A review from the top down will aid the team in identifying priority areas on a more objective basis. This involves taking the total project cost and nominating the top five trade costs. Within each of these cost centres, the top five cost-drivers should then be identified, and within them the top three costs.

It is highly unlikely under this approach that the VM work will discuss carpet tiles. If you start from the top down, the indirect costs which are normally percentage based, such as preliminaries, margin, contingency and so on, will look after themselves. That said, rigour should be applied to all assumptions such as preliminaries, wherever possible providing a reasonable estimate of such fixed and time-related costs rather than an arbitrary percentage.

4. There is no Single Solution

It is fair to say that as it is no one person’s problem, there will equally be no single answer. This is why devolution and ownership of the budget is so critical to success. If each party works hard on their respective component of the budget, the cumulative effect can be dramatic.

Whilst there is no panacea, a good starting point may be:

Architecture

  • What is the critical area requirement and how is this derived?
  • How efficient is the spatial planning?
  • What are the must-haves, neutrals and opportunities within the design intent?
  • Is a given material required for the aesthetic or is the composition of the material important for function?

Engineering

  • What is the basis and assumption of key engineering calculations?
  • Are there areas of uncertainty that additional work could tighten assumptions?
  • What spare capacity and redundancy is included? Is it required?
  • What is the whole of life cost of specified plant?
  • Is a centralised or localised system architecture better?

Client Costs

  • How have the project management or client administration costs been priced up?
  • Do you have assets which can be recycled?
  • Does the project need to account for initial maintenance?
  • Are there financing costs which must be accounted for?
  • What is the risk appetite of the client organisation?
  • On potential whole of life savings, does the cost of capital outweigh the benefit?

5. Spend it Like it’s Your Own

My final golden rule is to remember that the costs which you are working with eventuate to real money. Do not discount the importance of every decision you make in your role. If the whole team can avoid insulating themselves from the reality of cash, the more prudence will be brought to the project.

An important point is also that value management could in some instances result in costs going up, but this would be on the basis of a collective and assured pursuit of maximum value for your client.

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Discussions
2
  1. Tony Fendt

    Investigate value elements on the basis of the contribution to the commercial value of the project: Procurement – Time, Cost and Quality; Investment – Strengthening the investment performance; Life Cycle – input to strengthening the net cash flow.

  2. David Chandler

    Value Management Reviews (VMRs) have been with the industry for for nearly 40 years. They can be a sophisticated tool review the value for money proposition as a project advances through the various 40%, 75% and 95% design phase to assure clients that avoidable value leakage has been captured. Most VMRs however respond to situations where the initial scope and budget were misaligned, the project documentation control lost its way, or if tenders came in over budget.
    In each of these scenarios compromises are made as attempts are made to put the genie back in the bottle. Unfortunately time and negotiating positions change especially if the VMR is being run with the lowest cost or preferred tenderer. Quantity surveyors and their clients are reduced to margin players in this setting. Its akin to digging the same hole deeper as competing interests play out.
    Construction is a rapidly changing industry. Most clients, designers and quantity surveyors are unprepared for this. The traditional methods of procurement and supply chain disaggregation are now obsolete.
    Achieving better, smarter, faster and at least 20% cheaper requires new skills that leave the VMR process in their wake.