How can the project team identify the client’s needs at the start of a job? This cost model examines the techniques that can help firms define client requirements and develop solutions that add value to a project
A building offers value for money when the benefits derived from it significantly exceed its lifetime costs. But benefits are derived from the functions that a building performs, rather than from the building itself. This means that, where a project includes features that do not relate to the client’s stated objective, no benefit is derived from the additional cost and overall value falls. Similarly, a project that is built cost- effectively but that falls short of the client’s objectives does not provide good value, despite being built within budget. The project team has considerable influence over cost, project duration and quality of construction. By contrast, the benefits derived from a project, which include issues related to quality and design, can only be assessed by the client and end-users.
So, to improve value for money, the project team must define clearly the needs of the client, eliminate unnecessary expenditure and obtain the optimum balance between cost, time and quality.
The factors that influence value for money
Value on projects can be undermined by many factors, the most significant being poor project definition. The need to define relevant client requirements unambiguously at an early stage has become increasingly critical as the speed at which clients wish to advance their projects gives less opportunity for an exhaustive briefing process. This issue is particularly important on projects with a wide range of stakeholders whose diverse requirements will need reconciling and prioritising as part of a briefing process. Other causes of poor value include:
- Fixed mindsets and the unquestioning use of existing solutions by the project team
- Poor communication within the project team and the client body
- Lack of information
- Rivalry and politics within the project team and the client body
- Arbitrary cost-cutting without reference to the impact on the client’s objectives or the practicality of the project.
- The value added by a project is also reduced by unnecessary or unwanted costs, which can typically add 10-25% to the total cost of a project. They may include:
- Unnecessary constraints, such as a very prescriptive brief
- Inappropriate requirements, such as the need to build in long-term flexibility to accommodate an undefined future change of use
- Overly tight tolerances or unnecessarily high quality standards
- Use of bespoke design solutions rather than existing standard products
- Emphasis on initial capital costs at the expense of long-term operating costs
- High costs of enabling and temporary works that make no contribution to the finished product.
Increased value can also be obtained by improving quality, performance or by increasing speed to market, as long as these improvements relate to the needs of the client. In many cases, increased levels of expenditure generate additional benefits for the project stakeholders, such as a reduction in running costs.
Construction projects typically involve a wide range of stakeholders, each with different needs, expectations and aspirations. On public sector projects, stakeholders will be involved from the outset. Their needs will be addressed when establishing the project objectives. By contrast, on speculative developments, where stakeholders such as tenants and institutional funds are rarely involved at an early stage, their needs will be catered for by providing flexibility rather than by tailored solutions. Stakeholder requirements are met by the functions provided by a building rather than by the building itself. These functions generate different sources of value for different stakeholders:
- Use value is concerned with deriving maximum benefit for the end-user. In an office development, for example, the design may be required to focus on enabling organisational change with the minimum downtime. This requirement can influence the plan of a building, or the choice of environmental systems. Purpose-built corporate office buildings, such as the Wessex Water headquarters designed by Bennetts Associates, are good examples of project where the client prioritises issues that affect the use of a building throughout its life-cycle, such as long-term adaptability and energy efficiency.
- Exchange value objectives underpin most commercial development in the UK. Developers and institutional investors have conflicting exchange value objectives. The developer’s objectives of maximising lettable area and providing a competitive product at minimum cost must be balanced against the institutional investor’s requirement for investment to secure long-term rental growth. For construction clients whose first priority is to maximise exchange value, issues related to occupation, such as whole-life costing, will have a lower priority than for occupiers motivated by use value.
- Esteem value is primarily related to the impact a project’s image and reputation has on its stakeholders. The contrasting public reaction to Tate Modern and the Millennium Dome are good examples of the impact of esteem value. Issues related to esteem value, such as the projection of a positive corporate image or the contribution of facilities to a wider community, can reflect well on developers and end-users. Green buildings, for example, can make a major contribution to establishing a company’s green credentials, adding to shareholder value.
- Residual value is the value of an asset at the point where it has come to the end of its current use. For buildings with a long life, the net present residual value may be small, but the importance of a residual value to the client will determine the need to invest in long-term flexibility.
Stakeholders’ aspirations for a project can be contradictory, and they may not all be achievable within the constraints of available time and money. As a result, stakeholder needs must be identified and prioritised to ensure that the optimum combination of benefit and costs is secured. Value management techniques provide project teams with the framework and tools needed to facilitate this process.
Adding value: the application of value management
Value management enables clients and other project stakeholders to define and achieve their needs with the minimum use of resources. This is achieved by systematically applying team-based techniques that focus on project outcomes rather than the project itself. The different perspective that results from the adoption of this approach encourages the development of more creative solutions to problems, potentially eliminating many causes of poor value.
The agreed project objectives provide the decision-making framework within which cost-effective design solutions are produced. Functions that need to be provided to achieve the objectives are identified, and the project design is developed to focus on these requirements, thereby avoiding unnecessary cost. This process enables clients to appreciate the value of design and encourages the development of high-quality architectural solutions where these match the client’s needs.
Value management differs from conventional cost reduction in three ways: it aims to achieve the best balance between time, cost and quality; it is a multidisciplinary process that involves the whole project team; and its decision-making process is explicit, accountable and clearly linked to project objectives.
However, value management can be a very effective tool for reducing costs while ensuring that the spirit and quality of a project’s design is retained.
Value management applies a family of techniques at different stages of a project. The table illustrates the key project stages at which the process can be applied and the issues that are addressed at each stage. It helps to determine whether a building is needed in the first place and, at the other end of spectrum, contributes to the fine-tuning of the design for buildability once a contractor is appointed. However, the greatest opportunities for project improvement are at the early stages, as 80% of project costs are committed at the concept stage. Beyond this point, opportunities for change decrease, and the costs of and resistance to change within the team rise. The table also sets out some value management techniques:
- Benchmarking is used to compare design options and to build project models at the concept stage
- Function analysis is used to identify project objectives and success factors and link these to the design solution
- Life-cycle costing is used to evaluate options on total cost over the projected life of a building rather than capital cost alone
- Project review is used to assess the effectiveness of project processes and to provide feedback for continuous improvement
- Risk analysis and review is used to identify and address issues affecting the certainty of project delivery
- Value engineering is the structured technique, based on the analysis of functions, that is used to create, select and develop effective design options.
Value management activities are usually organised in a workshop, typically lasting one or two days. Workshops should involve the client, project team, end-users and other interested bodies. A facilitator should manage the structured value process, gather and process the information and prepare a workshop report. The process has seven stages:
- Preparation: This is the stage at which project objectives are clearly identified and study objectives are set. The facilitator gathers information before a workshop during a strategic briefing meeting held with client and other key stakeholders. The facilitator also circulates briefing documentation to the team. Depending on the workshop duration, other supporting information such as function cost models can be prepared in advance of the study.
- Information exchange and analysis of functions: Information exchange is the first stage of a formal workshop. This is where the facilitator explains the value process and the workshop plan. Project stakeholders also explain their expectations of the project. The analysis of functions shifts the project team’s focus away from the building design to the client’s needs. This change of perspective is vital to trigger the development of innovative solutions. The cost breakdown is a simple example of a function cost analysis.
- Idea generation: This brainstorming identifies better or more cost-effective ways of performing functions. At this stage, any attempt to evaluate the ideas thrown up discourages the necessary creativity.
- Evaluation: Ideas are evaluated against specific criteria and are selected for further development. The major benefits of evaluation in a workshop are the involvement of the project team and the use of explicit decision-making criteria and an accountable process. Facilitators use a range of evaluation techniques to build consensus decisions.
- Development of proposals: This is the final stage of a workshop when the project team works up selected design ideas. It involves confirming that ideas are practical, calculating cost, time and quality benefits and preparing an implementation plan. The final output of the workshop is a set of recommendations, including the advantages and disadvantages of each option. These are presented by the project team to the client for approval.
- Implementation of proposals
- Project review: This is also important, to ensure that recommendations are implemented and that the project continues on track towards meeting its objectives.
The seven-stage process is highly structured and needs to be followed closely if the client is to obtain the full benefits of value management. The benefits of adopting a structured workshop approach include:
- The agreement of unambiguous project objectives by the team
- Better project definition that gives the client greater certainty that the project addresses its objectives
- A rational and accountable team-based decision-making process that involves the consideration of alternatives
- The identification of opportunities to eliminate unnecessary cost
- Team contribution and commitment to workshop recommendations
- Improved communications and understanding, including the acceleration of the teambuilding process
- Greater levels of innovation resulting from examining what things do rather than what they are made of.
Procurement issues: delivery of added values
A high proportion of construction work is procured by competitive tender. When competitive tenders are based on comprehensive design and specification documentation, they can provide value for money, delivering a project on the basis of clearly defined cost, time and quality criteria. However, the certainty of the outcome of traditionally procured contracts is heavily dependent on the quality of the information available at tender stage. Furthermore, traditional procurement routes provide little opportunity and no incentive for contractors to add further value to a scheme. In contrast, two-stage procurement routes are increasingly adopted to appoint contractors at an early stage, while further down the supply chain, design responsibility is often passed to specialist contractors. In both instances, there is no formal process available to assess the ability of a contractor to contribute to a project beyond the strict terms of the contract. Contractors can add value in a range of areas:
- Improved teamwork to avoid confrontation and resolve issues collectively in the client’s interests
- Improved programming to shorten project durations or develop solutions to particular constraints
- Improved design and specification, either by improving buildability, or by identifying alternatives that increase performance or reduce cost with no effect on quality
- Contributing to risk and value management procedures
- Taking better care of the environment
- Contributing to the delivery of cost certainty.
Selecting a contractor on price alone may be a barrier to identifying the contractor best equipped to contribute value to a project. Techniques are available to help clients appoint contractors on a wider range of selection criteria, which could include management capability, time, cost and quality issues, together with other issues related to health and safety and the environment. The key components of a value-based contractor selection process are:
- The identification of the client’s project objectives and how the project will add value to the client
- The identification of opportunities for a contractor to add value
- The development of an appropriate procurement strategy to enable contractors to add value, including appropriate mechanisms for sharing risks and rewards
- The definition of selection criteria
- The collection of information
- The selection of a contractor based on a combined assessment of price and ability to add value to the project.
The implications of government best-value initiatives will make it increasingly necessary for public clients to appoint project teams on an explicit basis of value rather than cost.
The output of the value management process will help to ensure that a project is set up to enable a contractor to contribute fully to the value-adding process.
The cost breakdown features a simple cost summary and a more detailed functional cost analysis of a leisure facility. The functional cost breakdown illustrates how the costs of a building project can be allocated to what the building does rather than what it is made of. The cost breakdowns are summarised in the pie charts . The cost model is based on a case study of the extension and refurbishment of an existing bar/restaurant, with a total gross floor area of 855 m2. The primary objective of the project was to increase the rate of return on the investment, measured by internal rate of return, to more than 20%. The first chart shows that the bulk of capital expenditure is focused on fixtures and fittings and external works. However, the original scheme could not meet the 20% target.
The value management study identified six success factors on which the design had to focus to meet the 20% target.
- Attracting customers
- Attracting and retaining staff
- Encouraging customer spend
- Satisfying legal constraints
- Enabling ease of operation
- Minimising operational and maintenance costs.
The functional cost breakdown allocates the construction costs to these six key functions. It demonstrates that expenditure is focused on attracting customers and on operational issues, and that relatively little was spent on encouraging customers to increase their spend. The study generated more than 200 creative ideas to improve the scheme. The final recommendations of the workshop were:
- To increase the extent of new-build construction instead of refurbishment, resulting in a more rational layout of back-of-house areas. This resulted in a 4% reduction in capital spend.
- To change the layout of the dining area, resulting in a 5% increase in covers. The increase in revenue meant that the 20% target was met.
- To replan the car park, increasing the number of spaces by 50%. Replanning also resulted in a small cost saving.
- To introduce changes to reduce the design and construction programme by two weeks. The extra revenue generated by speed to market increased the internal rate of return by 0.4%. Thanks to the value-management workshop, the project was able to proceed. The design innovations identified during the workshop were later introduced into other projects.