Project Management Risk – The Real Cost of Value Engineering

Problems stemming from “value engineering” are a common source point in many of our forensic engineering and claims management engagements involving systems, equipment or materials where the actual performance is found to be ‘problematic’ with respect to project expectations.  Misunderstandings concerning the purpose and intent of value engineering are often at the heart of the problems we have noted. As a caution, the “value engineering” intent to reduce first costs will almost always succeed in the short term, but may fail to deliver “best value’ in the long term.

The old adage- “necessity is the mother of invention” is certainly true in the case of the value engineering concept.  VALUE ENGINEERING was “invented” by employees at the General Electric Company during World War II as a result of the “necessity” to find good substitutes for certain labor skills, raw materials and component parts which were in short supply. The GE employees soon realized that the substitutes, in many cases, either performed better, or were less costly or both, than the item they replaced.  The next step, logically, was to apply this new process to items which weren’t in short supply, but which might be improved through the use of a cost-effective substitute.

Value Methodology

Value Engineering is sometimes referred to as Value Methodology, Value Management or Value Analysis.  These terms are essentially interchangeable.  The Society of American Value Engineers (SAVE) International defines Value Engineering as “a systematic and structured approach for improving projects, products and processes.”  Others may have a slightly different definition, but they are variations on the same theme.

Essentially, Value Engineering is a process whereby the value of the project is increased through either an increase in performance, function, or quality, etc. at the same cost or a decrease in the cost while maintaining the same performance or a combination of both.  While necessity during wartime may have been instrumental in the development of the Value Engineering (VE) idea, over time the VE idea has morphed into a somewhat ‘standard practice’ that is driven by factors other than necessity. In many cases today, a VE period may be required or expected to be performed during the course of the development of a part, product or project – the goal being to maximize performance for each dollar spent.

The project under development can be an office building, the HVAC system in the building, a fan in the HVAC system or the material used in the fan blades. Value Engineering will likely occur at each step along this path and it will be done by different parties. For instance, the manufacturer of the fan may perform a VE analysis on the material used in the fan blades but would not be expected to perform a VE analysis on the HVAC system or the office building design itself. Likewise, the HVAC system designer would not be expected to ‘value engineer’ the fan blade materials.

Increasing The Value of a Project

Naturally, the purpose of any Value Engineering analysis is to increase the value of the project under development.  The value of the project is directly proportional to the performance or function of the project and inversely proportional to the cost of the project.  In other words, if you increase the performance or function of a project relative to its cost, then the value increases.  Conversely, if the cost of a product increases relative to its performance or function, the value decreases. Obviously, value is maximized when performance is “optimized” at the minimum cost. However, the performance parameters need to be defined such that they can be truly compared relative to cost.  For example, energy use intensity (EUI), overall operating efficiency, mean-time-to-replacement (MTTR), life cycle analysis (LCA), etc.

As a simple example, the design of an office building with a 10,000 square foot (sf) footprint could be configured at 100 feet x 100 feet (a square) or at 50 feet x 200 feet (a rectangle).  Both result in 10,000 sf. building. All other things being equal, the function of the building, to provide 10,000 sf of work space, would remain the same.  However, the initial construction cost of the rectangular building would be greater due to an increase in the perimeter wall, 500 linear feet, compared to 400 linear feet for the square building.  In addition, the increased perimeter would result in more envelope surface area which would increase heating/cooling costs over time. On the other hand, the rectangular building would allow for greater penetration of daylight into the interior spaces which could reduce the lighting load over time, which would also reduce the cooling load – thus reducing operating costs.  One ‘value decision’ could save in the short term, but cost more in the long term; whereas another ‘value decision’ might cost more in the short term, but save even more over the life cycle of the building.

This highlights an important point regarding ‘cost’ and ‘value.’  A Value Engineering analysis should not only consider just the ‘first’ or construction cost of the project.  Consideration must also be given to future costs such as those necessary to operate, maintain or upgrade the product.  In some cases, there may be trade-offs to using certain systems, equipment or materials with lower initial costs, such as increased costs in operation and maintenance or a shorter useful life.  Obviously, the cost to operate and maintain the less costly “solution” or the need to replace it sooner could exceed the savings realized in the reduced up-front costs.  Therefore, the life-cycle cost of the product should be considered in any Value Engineering analysis.

BusinessDictionary.com defines life-cycle cost as the “sum of all recurring and one-time (non-recurring) costs over the full lifespan or a specified period of a good, service, structure, or system.”  Minimizing the life-cycle cost (C) without a loss of performance or function (P) maximizes the Value (V) of the product.

Often, the term “Value Engineering” is used as an umbrella covering a number of things, some of which are NOT true Value Engineering. An example of this is changing a specified ‘design element’ to ‘find money’ to cover a scope change, design or construction error, omission or correction, etc. These may end up reducing the costs so as to stay ‘on budget’, but often the ‘value’ of the changed item is also reduced in the process due to a loss of performance or function.

Some ‘Real World’ Situations…

An HVAC piping system was specified to be a fully welded, steel pipe system.  As a ‘value engineering’ change, the decision was made to go to a piping system using mechanical pipe couplings in lieu of welding, for a savings of $75,000. While in a static temperature\pressure system, there is little difference between the welded system and the coupling system, when there are changes in the temperature of the system, the piping will undergo stresses associated with those changes. The resulting stresses can exceed the capabilities of a coupling-based system unless additional stress compensation is provided, while a welded system does not need any additional stress compensation due to the increased strength and inherent flexibility of welded joints. Thus, while each mechanical coupling joint may cost less than its comparable welded joint, the overall use of a coupling-based system will require additional stress compensation components (expansion loops and/or expansion joints) to relieve the pipe stress imposed due to changes in system operating temperatures. If the coupling-based system is used without properly accounting for the pipe stress, the joint could decouple and fail, draining the water out of the piping system into the building. That is exactly what happened at the Medical Center where this ‘value engineering’ solution was chosen – on four separate occasions. And each failure took the central chilled water plant off line and drained several thousand gallons of water into the main mechanical room, which was on the first floor of the building. A forensic analysis was conducted to determine where additional stress compensation needed to be installed and several joints welded to ensure reliable operation. This work, coupled with the need for a temporary chiller plant, cost over $500,000.  That is almost 7 times the amount of the ‘savings,’ not including the cost of shutting the chiller plant down.  Is that ‘value’??  Where did the responsibility to assess the difference in stress handling capabilities lie? With the contractor who made the suggestion? With the design engineer who accepted it? With the owner who had their own engineering staff in place?

There is much to be gained by the performance of a proper Value Engineering process.  Two things are necessary in order to maximize the benefit of value engineering and the value of the final project:

1. It should be started as early in the design process as possible.  The sooner it is started, the more impact and less disruption it will have on the overall process, performance, function, quality, etc. of the project. Because as the design process progresses, some features or functions have a tendency to become fixed or “set-in-cement” and any change becomes more difficult and expensive to affect.

2. All of the project stakeholders should participate.  What seems ‘best’ in the near term or ‘normal’ operation may prove far from ideal in the longer term or during critical or emergency conditions.  Each of the project participants comes to the table with their own perspective.  If each believes that their viewpoint was fairly considered and that they too will benefit from the process, then they will be more willing to buy-in.

So the question looms large: What is the value in Value Engineering? A truly thoughtful assessment of the pros, cons and available alternatives to various materials, equipment or systems can yield significant savings to a project. However, it is crucial to think holistically about any change decisions. Compatibility, durability and serviceability are key elements for consideration. If the risk\reward profile is overly asymmetric – the potential project downside is much more ‘bad’ than the potential project upside is ‘good’ – then the wise project leader should choose judiciously what values they attempt to capture.  In many cases, the best choice might be some modified version of the VE suggestion….or it may be no proposed VE version at all.  It can pay major dividends to get an unbiased view on the potential upsides and downsides from a set of eyes that has seen both. Peer reviews can save a lot of headaches downstream and can help you get into the right boat from the start.

MDC Systems has over 50 years of experience in the analysis and resolution of complex design and construction issues, including those caused by the defective understanding or performance of “Value Engineering.”

Authors: E. Mitchell Swann, P.E. and Larry Poli, P.E.