Methods of Value Engineering

CHAPTER1: INTRODUCTION

In future the proactive and effective manage of cost, contracts, communication and claims – the four Cs- will consistently become more important to developers and facilitators involved in physical structures and properties.

The Quantity surveyor should understand the challenges and opportunities presented by the needs of client in relation to cost, contracts, communication and claims and perhaps focus their development on the important links between the functions.

Changes and developments in the industry and market will also influence the way in which these functions are managed. For those professionals who deliver these services to the industry, the focus should be on client satisfaction and a positive experience for all concerned. Establishing a link in effectively managing the process to ensure success should be the primary aim of the manager. This should be done in close partnership with all functionaries, engaged in the process.

Planning, controlling and co-ordinating budgets and cost plans, as well as communicative results will limit claims and facilitate the process of contract management. The contract should also facilitate partnerships and the system should be aimed at satisfying needs, seeking opportunity and perusing growth.

CHAPTER 2: AIMS & OBJECTIVES OF THE STUDY

The main objective of this paper is to study the subject of value engineering (now know as value management) from QS (M&E) perspective. Based on the parameters; cost, contracts, communication and claims the value engineering study is done and the challenges faced by the quantity surveyor is also discussed. The objective of the study can be summarized as follows.

• To study the subject of value engineering and its methodology.
• To study the value engineering importance in cost management and the quantity surveyor’s role.
• To study how the selection of contracts can add value to the project and the quantity surveyor’s contribution to that process.
• To study the quantity surveyor’s communication strategies to achieve the expected value and client’s objectives.
• To study how the knowledge of quantity surveyor can add value (in terms of money, time and effort) during disputes.

CHAPTER 3: VALUE ENGINEERING THEORY & METHODOLOGY

3.1: Methodology

Value engineering methodology evolved in the 1940s when the transition was made from the search for an alternative to the search for means of fulfilling the functions of an alternative. Shortly afterwards it was observed that function-oriented alterations in working methods often result in improving quality along with eliminating unnecessary cost (Palmer et al., 1996). Since its introduction, the methodology has been well developed to be applied in construction industry, as it enables realization of life cycle cost and cost effectiveness of projects (Omigbodun, 2001). VE in the construction industry is mainly an organized effort to challenge the design and construction plans of projects to provide the required facility at the lowest overall costs, consistent with requirements for performance, reliability and maintainability (Dell’Isola, 1988). Delays in construction projects may be due to lack of meticulously devised plans (Ghorbani and Shokri, 2005) and consequently budget deficit (Mirmoham madsadeghi and Aghdami Thani, 2005). Through all-pervasive utilization of the VE methodology such obstructions may be avoided. This judgement is made on the grounds that VE can improve plans and designs along with thriftiness in budget expenditures. Researches (e.g. Mirmoham madsadeghi and Aghdami Thani, 2005) show that this negligence is often due to limited access to experts and lack of knowledge about the method and its benefits (Table 1). One may realize that these two factors may predispose VE teams towards other obstruction factors (Mirmoham madsadeghi and Aghdami Thani, 2005).

This obstacle may be surmounted with recourse to artificial intelligence (AI) models. Case-based reasoning (CBR) from AI may be utilized to enhance efficiency of VE study through outlining a model of the expert knowledge for a VE workshop. The inherent analogical nature of a CBR model would facilitate access to more comprehensive and systematically classified information during a VE workshop. Inasmuch as VE in the construction industry encompasses a cognitive process, such a reasoning method could be indispensable and could affirm promising results. Furthermore, classified background knowledge of the knowledge base may enhance the creativity of the VE study team, and transform their creativity to capability from an instinctive behaviour of mind.

3.2: Value Engineering Theory

VE may be defined as a creative, organized approach whose objective is to optimize cost and/or performance of a facility or system (Dell’Isola, 1988). The focal points of the notion are function analysis and creativity. Through defining functions and classifying them, it spots functions with more potential of increasing value. Thereafter with the creative approach alternative ideas would be recommended to replace original design. An established framework for fulfilling assigned tasks of the methodology has been defined as the VE job plan. The job plan is defined through special phases ranging from five to eight in various versions, all following the same concept (Assaf et al., 2000). A typical version, comprising five phases, is selected in this study (Philips, 2003):

(1) Information phase: information acquisition, function analysis and selecting areas with poor value for detailed study.

(2) Creative phase: generating ideas as an alternative to meet the requirements of an understudied function.

(3) Analytical phase: evaluation of ideas and selecting the best practical ideas.

(4) Development phase: developing prominent ideas and selection of the best idea.

(5) Presentation phase: recommending a VE change and improvement proposal in a most challenging format.

Teamwork is an essential phenomenon in the VE job plan, resulting in crossing organizational lines (Dell’Isola, 1988). The ideal groups for VE should embrace different disciplines (Phillips, 2003):

• Design groups comprising project engineers, designers, draftsmen and mainly engineers who are responsible for construction.
• Operators groups comprising supervisors and construction engineers.
• Experts in costs groups with e.g. cost evaluators and accountants.
• Development groups comprising construction experts, commercial and financial experts.
• Organizer groups such as trouble-shooters or construction managers.

CHAPTER 4: MANAGEMENT OF COST

4.1: Aims & Goals of cost management

The basic goals of cost management and pricing of a project or product relate to the link between price and intrinsic value, affordability in relation to needs or investment, and managing the procurement process. The cost managers should therefore understand that they need to work with clients from the very inception of a project, even earlier and then through out the process to ensure the best results. This does not mean that a cost planner or cost manager is a cost cutter, far from it a cost manager should take responsibility ( with designers, client and other roll players) to ensure the interest of the client, community and environment are served ( Ferry and Brandon, 1991:5).

Grover Cleveland (cited in Nel, 1992:43) stated the following about the property investment: ” No investment on earth is so safe, so sure, so certain to enrich its owner”. However, one also has to take best value into account as well as to put available funds to best use. This includes gearing, cost design or design to cost, cost planning, cost control, architecture, location environment etc.

Sound investment has proven its value, been a safe guard against ill fortune, produced income, provided security and shown itself to be away of producing wealth( Nel, 1992:43). Utilizing funds to best effect will improve these benefits even further.

The cost manager needs to understand that the type of construction required for a building will also influenced the performance of the building over time, including the functional performances of the user’s environment (mole, cited in Venmore- Rowland, Brandon and Mole, 1991:307).

The cost managers should be continuously involved from the design to the co-ordination and auditing, to ensure best cost results, specifically in commercial property, where investment is required to yield the best financial returns.

Other areas of cost management that need attention are cash flow, the timing of payments, interest rates and the availability of funds at specific times. These aspects also influence the total financial outlay and eventual returns on a property investment.

Kenley (2003:3) stresses the potential value of improved and strategic cash flow to enhance the profitability of the construction industry, with the further potential to offer reduced costs to the client and improved contractor performance.

Cash flow forecast and management should therefore be part of the cost manager’s service to ensure that the developers receive the full benefits of pro-active attention.

The cost managers (Quantity Surveyor’s) involved must go beyond a re- active service. It should also include a service that takes the following aspects of value into account.

• Physical: a quality building
• Psychological; a pleasant looking building which is good to live in,” places of the soul”
• Real quality: cost effective but with specifications that fit the purpose.
• Durability: taking life cycle costs and whole life cycle costs into account.
• Design: design to cost, cost design and appearance.
• Affordability: budget and returns are important.
• Timelessness: short term fashions as opposed to design that will withstand the pressures of current whims.

The cost manager, while communicating alternatives and options to the designers and the client should remember the role of relative quality, affordability, returns, as well as the latter’s link to design and specification.

4.2: Quantity Surveying and cost management methods and tools

Although cost management may be seen as an obvious and simple process, in reality it is not. All aspects associated with a project have a direct impact on costing and how it is managed (knipe et al., 2002: 257).

The quantity surveyor is ideally placed to manage this complex process. If the methods are followed correctly and the tools used effectively, cost management may produce exceptional results.

4.2.1: Cost Design

This process is based on design aimed at satisfying the parameters dictated by cost, cost of acquisition, operation and management. The process may also be described as cost design where such design is defined as designing a project in economic terms, taking into account the cost and cost benefits of each element of the project in an effort to balance the interrelationship of all cost elements and the reason for its existence ( Knipe, 2002:276; Verster and Berry 2005:20-40).

4.2.2: Value Management

Value management is a systematic approach and process earlier referred to as value engineering, to ensure delivery of a function or product at the lowest cost without detriment to quality, performance or reliability (Ashworth, 2004: 409-421; Green 1992).

Value management is a continuous process that should occur throughout the project but is most effective when implemented right from the inception of the project. More over, it should also include the following aspects:

• Orientation: Understanding the issues
• Information: Identification of functions, needs, budgets, project constraints and timing.
• Speculation: The creative development of ideas and alternatives
• Analysis and evaluation: Elimination and filtering of ideas.
• Development: Examination in detail
• Selection: The final proposal
• Conclusion: Presenting the findings to the client.

Value management is one of the effective tools available to quantity surveyors who are in a position to play an important role in ensuring that the client and designers actually consider all value and cost related aspects of construction, design specification and development options.

4.2.3: Cost Planning

Cost planning is used to ensure that the developer knows in the early stages of a project what the anticipated final cost of the total development may be, including the cost of land, legal issues, demolitions, buildings, professionals, furniture, connections, tax, financing and management. Building cost is only of the items, but the quantity surveyor should include all costs in the cost plan of the final cost. The cost planner should have a clear understanding of cost and budget targets to enable him to adjust the developer about possible future over-runs and pro- actively to provide alternative solutions (Ferry and Brandon, 1991:9).

One of the most effective tools that the quantity surveyor uses to assist with the planning and design process is the elemental cost plan. The theory behind the analysis of building costs per element is that the total cost is a sum of the cost of individual so- called elements such as walls, roofs, foundations, etc ( Morton and Jaggar, 1995:41-43).

4.2.4: Cost Control

Linked to auditing, cost control is an activity that is aimed not only at reactive reporting of decision results, but also at accounting for the decisions and visions of the client and advising the client how best to achieve desired outcomes (Knipe et al., 2002:257). Cost control happens through out the deployment process, from the briefing stage to completion.

4.2.5: Cost Checking

This process is necessary to ensure that the client is always informed about the actual performance of the building in cost terms in relation to the budget or cost plan.” The actual cost of each element or section of the building as the detailed designs are developed is checked against the cost target or cost plan, or specific elements in the cost plan”( Seeley, 1983:14).

4.2.6: Cost Analysis

Cost analysis supports the quantity surveyor’s service to the client and can provide the quantity surveyor with useful cost information and data. The forms of cost analysis are identified by Ashworth (2002:69), namely;

• Identification of major cost items
• Analysis of the annual user cost of building ownership
• Identification of those groups of items(elements) of cost importance

4.2.7: Cost benefits analysis

The aim of cost benefit analysis is to establish the real benefit of expenditure not only in financial terms, but also in terms of time and energy expended by human resources, and the social benefits (Ferry and Brandon, 1991:12-13).

4.2.8Life cycle costing

The life cycle costing also known as cost-in- use describes the modelling techniques aimed at coping with the mixture of capital and running cost of buildings and effect on ownership of a building. The quantity surveyor must be very sensitive to the influence of all cost factors so that the client receives advice that is practical, applicable, timely and effectively

4.2.9: Cost reporting

The Quantity surveyor must ensure that continuous, accurate cost information, analysis, cost results and cost influences are reported to the client and design team.

4.3: Conclusion

Using the above tools, techniques or methods and implementing them effectively will result in a better product at a better price with lower maintenance cost and an increased return potential over a long period of time.

Money is the most limited resource and the challenge is to utilize it optimally. Though the quantity surveyor is ideally positioned continuously to play an active role, he should also be more involved in strategic decisions to empower clients even more.

CHAPTER 5: CONTRACTS AND THE QUANTITY SURVEYOR

5.1: Aims and goals of construction contract

A contract is a document that spells out the rights and obligations of parties and the administration of this interaction while protecting the parties against the risks that emanate from various relationships, action s and production.

Many alternative ways to procure contracts exist, but experience has shown that a partnership approach as opposed to a two -sided procurement method is preferable. The secret of success may be in the organization of rights, obligations and administration, in such a manner that mutual support by the parties and effective professional service to the contracting parties are important factors to be included in the contract.

Although the legal systems in countries are very specific to each country, there are important aspects that need to form part of any construction contract in any country ensure harmony, the parties understanding o f duties and the effective administration of obligations:

• Objectives: Offer acceptance and performance
• Preparation: Documents
Design responsibility
Agents
Site representation
Regulations
Works risk
Indemnities
Insurances
Securities, guarantees etc

• Execution: Preparation
Access to the works
Access to the works
Setting out of the works
Assignment
Nominated and selected sub contractors
Direct contractors

• Completion: Practical, works and final completion
Defects liability periods
Sectional completion
Revision of dates
Penalties

• Payments: Interim payments to the contractor
Adjustments
Recoveries
Final accounts

• Cancellation: By the employer or the contractor and the rights related to
Default and disaster

• Disputes: Litigation, arbitration, adjudication and mediation.

The above headings taken from an agreement show the general terms that should be included in a construction contract, but one needs to remember that many project- specific variables also need to be included in the agreement. The contract documents, apart from drawings and specification, should also include the following:

• Preliminaries – the management of the contract
• Trade preambles – basic standard specifications
• Bills of Quantities – depending on the method of procurement used, but compiled in accordance with an acceptable and agreed standard.
• Guarantees.

5.2: Procurement options

Although the quantity surveyor’s service is traditionally linked to the production of bills of quantities, the profession has evolved to play a pro-active role in any procurement alternative and contractor selection process. Once the quantity surveyor’s service, in relation to pre-contract cost advice , is concluded, the very important next service phase of procurement advice and action should be addressed.

Basically, procurement can be divided into two main alternatives, these are:

• Price-in-advance methods
• Cost-reimbursement methods

Various other procurement methods for diverse needs and reasons are used, such as cost plus, construction management, design and manage, and measured term contract. The primary considerations for contractor selection or procurement, however, are the following: the influence of cost, time and design as well as the client’s needs and budgets. For this reason, the quantity surveyor may promote the multi-procurement method to enable the client to control the effects of time and cost, continuing to allow space for sustained design, development, effective professional service and contractor involvement. The method relives on producing procurement documents timely, on a provisional basis, based on provisional design information. This enables the procurement of a main contractor who will manage many other selected or nominated sub -contractors who will be procured during the development of the building, as detailed information becomes available. The secret of this method is that mutual understanding and a very close working relationship between all role players must exist. The quantity surveyor performs a very important task in the execution of the project.

5.3: Conclusion

The proper selection of an appropriate procurement method and the introduction of effective contract terms that will enable the contracting parties to focus on the work at hand should derive from pro-active, knowledge -based advice to the client, taking all aspects and circumstances of the proposed project into account

Contracts, ensuring a partnership approach and imposing order on the rights and the obligation in proper manner, generally cover all risks and ensure effective contributions by the client, contractor and professionals.

CHAPTER 6: THE MANAGEMENT OF COMMUNICATION

6.1: The goals of a communication strategy

6.1.1: Contract communication

Contract terms should be communicated to parties and people involved so that they have no or little doubt about the meaning of words or terms. For this reason, the following aids are used by courts to interpret contracts:

• Avoidance of absurdity
• Upholding the contract or clause as opposed to ineffectual or void interpretations
• Equitable interpretations
• The intention s of the parties
• The recitals are subordinate to the operative part of the contract
• The grammatical meaning of the words used
• The contract will be interpreted as a whole in respect of the purpose and scope
• The technical meaning of words
• The written contract itself as opposed to verbal explanations

It is clearly understood that the contract guides the official communication related to rights, obligations and administration of the contract and by all the parties involved. It is therefore important that the quantity surveyor should understand all issues related to contract communications.

6.1.2: General communication

“In the information era, however, the strategic resource is information, knowledge and creativity. There is only one way a corporation can gain access to these valuable commodities through people its most important resource” (Naisbitt and Aburdene in Puth, 1994: 25)

The above quotation illustrates how important it is to work with people, not only informally but also formally by means of contract documents, and in the process communicate well with them. People are the most important resource and thus the most important aspect and source of success.

6.2: Communication using management and leadership methods

While contract communication is generally used as a formal and official communication method to ensure that the rights and obligations of parties are protected and enforced, management and leadership communication, as an approach or method, are very important elements in ensuring results.

6.2.1: Management communication

Management communication is the number one problem in business today. While technology has advanced in leaps and bounds, managers and academics understanding of the substance of the process.

Communication is seen as the life-blood of organizational management; therefore, the manager and professional must have an adequate knowledge of the nature and role of communication although it is difficult to do well or understand the influence of communication (Ewing in Puth, 1994: 3).

The effective communicator should have a well-founded understanding of substantive transformation as a basic approach. Management is inherently a problem-solving job ( Whetten and Cameron in Puth, 1974: 109), indicating the importance of communication while obvious criteria for solving problems are expertise, knowledge, skills and experience , using sound management principles to transmit function -and- outcome expectations.

6.2.2: Leadership communication

Leadership is based on communication. Leaders communicate not only information, but also attitudes and assumptions (Emshoff and Denlinger in Puth, 1994: 146).

Since professionals often find themselves in leadership positions where clients and other parties rely on their expertise and skills, the professional must also be able to communicate and be concerned with:

• Coping with change
• Understanding competition and markets
• Be able to inspire followers
• Be a good example and influence people to achieve goals

Emshoff and Denlinger in Puth (1994: 147) suggest that many corporations today are over-managed and under-led. Professional leadership is needed and should be the concern of all professionals.

Autry and Mitchell (1998: 214) suggest that a wise leader should embrace the paradox of:

“By not forcing, he leadsBy not dominating, he leadsBy not leading, he leads”

Leadership asks for communication with subordinates, partners, professionals and other functionaries. Leadership is expected of any professional because of his position, knowledge and pro-active service. The lessons to be learned from the above are that communication is not forceful, not dominating, but accommodating.

6.3: Conclusion

Colin Bower warns against a specific form of leadership, in his words:

“Leadership is never a neutral value – far from it, it polarizes and divides” he continues “the cult of leadership is not more than the most thinly and inept disguised cloak of tyranny”. He argues that we do need leaders in battles and expeditions, but because of these times, it should not mean that they are always needed and that “leaders fudge issues and paper over cracks by substituting evangelical qualities for good organization, agreed objectives and rational propositions”. He concludes with an idealistic picture of competent individuals acting as his or her own leader (Bower, 2005: 2).

It remains clear that leadership could be all of the above, but that effective communication and partnerships with individuals may lead to success.

CHAPTER 7: MANAGEMENT OF CLAIMS AND DISPUTES

7.1: The goals of claims and dispute resolution

The goals o f claim and dispute resolution are firstly to establish the right of any party to submit a claim, and secondly to enable the other party to consider the claim in terms of its validity, contractual terms and possible outcome.

Lodging or considering a claim do es not mean that a dispute exists, but should the rejection of a claim occur, a different interpretation of a claim exist, a difference of opinion obtain, one has to note that a dispute may then be lodged. Dispute resolution should then assist the parties in resolving such an impasse in a cost effective, satisfactory and timely manner.

7.2 The methods used to resolve disputes

For the purpose of this paper, the methods to be discussed are cancellation, adjudication, mediation and arbitration.

7.2.1 Conciliation

In an effort to resolve a dispute, satisfactory results are never guaranteed, not even in a court of law. It is therefore perhaps important to use inexpensive ways and methods to try and resolve a dispute.

Results have shown that conciliation does have a remarkable measure of success in regard to solving differences before they can become disputes.

The parties decide who the conciliator will be. The conciliator should, however, be a person with good communication skills and knowledge. The objective is to bring the parties together in a forum to investigate their contentions and assist the parties to formulate their own settlement, by indicating the consequences. Improved communication should be ensured through joint and separate meetings. The conciliator may also be requested to formulate an own opinion. In the end, parties are still left with the option to continue with litigation or arbitration. Conciliation, however, has the following foci and advantages:

Control – the parties control the process

Consensus – the parties aim at the best commercial solution

Continuity – the relationship will continue

Confidentiality- no harmful public exposure

The following diagram illustrates the difference between litigation and all ADR (Alternative Dispute Resolution) processes:

The quantity surveyor, with good communication skills is ideally positioned to play an important role in respect of conciliation because disputes usually revolve around payments, valuations, certificates and penalties.

7.2.2: Adjudication

Adjudication is an accelerated form of dispute resolution in which a neutral, impartial and independent third party deals with the dispute as an expert and not as an arbitrator, and whose determination is binding unless and until invalidated or overturned b y an arbitration award.

The adjudicator shall not give advice to the parties or their representatives concerning any aspect of the Agreement in respect of which he has been appointed other than in accordance with stated Rules[Joint Building Contracts Committee (JBCC) 2005 4.1 Adjudication rules, cl. 1.1, 3.2]

The procedure may be as follows:

• Either party shall submit full details of a dispute arising in terms of the agreement, together with copies of all relevant documents
• The other party may submit a written response
• The adjudicator shall:

  – act as an expert and not as an arbitrator

  – adopt the most cost – and time -effective procedure

• The adjudicator may also:

  – convene and conduct a hearing

  – determine the payments and costs of the dispute on the basis of the submitted documents only

  – meet with the parties

  – decide on his own jurisdiction

  – make use of specialist knowledge

  – open up documents related to the dispute

  – refuse admission to any persons other than the parties

It is important to note that a n adjudication award is not binding on the parties, but is most definitely a process that will limit the costly processes of arbitration and litigation. Quantity surveyors and cost engineers are ideally positioned to play a very active role in adjudication.

7.2.3: Mediation