Best-value optioneering

Andy Green
Ensuring that value engineering genuinely delivers value rather than providing the wrong solution for the price we first thought of — Andy Green
When capital cost exceeds the available budget it is time to practise best-value optioneering — namely, investing in the right solution, not in just doing the project really well. ANDY GREEN explains.Whether constructing an entire development, or selecting the specification for an element of the building-services installation, one of the challenges is getting the right balance between costs and performance — whilst also satisfying wider stakeholder requirements, such as social, environmental and sustainability issues. Whilst occasionally money may be no object, more often there will be tensions between aspirations and affordability. Resolving these tensions first requires a proper assessment of the investment options, which ideally demands taking a view based on whole-life value, rather than relying on an approach to decision making based on an initial purchase price. However, for a number of reasons, attempts at this typically result in investing in the wrong solution! • Lack of understanding of how practically to undertake whole-life-value investment decision making. • Absence of tools to enable the stakeholders to evaluate options and easily compare the inter-relationships between cost and performance and other factors. • Absence of robust data on running costs. •Not presenting the total costs of ownership in an understandable way, to inform option appraisals. All too often financial tensions result in good ideas being cast aside, not only resulting in significant short-term compromise but often also cutting off opportunities for making better future returns on the investment. Consequently billions of pounds continue to be wasted on ill-thought-out construction schemes, with inappropriate regard for sustainable development. Impact on buildings for the future Considered in whole-building terms, the situation might be encapsulated as follows. The current ‘Building schools for the future’ programme is looking for transformational solutions to impact positively on the future academic results of our children. The challenge, therefore, is to create learning environments which meet the Government’s transformation agenda for tomorrow’s and future educational needs, whilst also being sustainable, compliant with relevant design standards and environmental targets — and also ‘affordable’. Now that is some challenge! Architects and educational planners are responding to the challenge and, after engaging with the head teachers and other interested parties, come up with transformational schemes. Unfortunately, when the schemes are costed, all too often they are well beyond the available budget. The classic reaction to such circumstances is to make hard compromises to the design features that, in this case, might put at risk the educational agenda — in pursuit of making a scheme ultimately affordable. Something has to give, otherwise the sums simply do not add up. Clearly, in this scenario, a different approach is required if we are to avoid making ill-informed compromises which could have a dramatic impact on the education of future generations. The two most critical problems that arise with the ‘classic reaction’ are that, in effect, value ‘optioneering’ has not been done properly and the way in which funding is provided has not been considered in sufficient detail. Learning from how we make investment decisions in our everyday lives A far better scenario is to engineer the design solution in such a way that future opportunities remain open and to look at alternative funding routes to avoid compromising the prime agenda. A useful analogy is to be found in how we lease a new car. We want a 3 Series BMW with all the latest accessories. But the top-of-the-range model is beyond our budget. Clearly our aspirations exceed what we can afford. Hence we have a simple choice — down-spec on some of the extras, or be prepared to pay the price. In reality, what actually happens is you run ‘what-if?’ options until you get the spec you want at a price which you can ultimately live with. If you consider alternative models instead, you may have to compromise on the performance, space or image that you were seeking. On the other hand if you buy a 3 Series and defer adding the alloy wheels and satellite navigation system until next year you get what you wanted — it just takes a little longer. Exactly the same principles can be applied to different elements of value optioneering a building scenario. ‘Value managing the options to ensure the objectives can be met,’ should therefore be the mantra. It follows that a controlled, but also a flexible, approach to funding will greatly assist. Most often, examination of funding timescales will offer the greatest opportunity. If the budget is £10 million and the proposed design/installation costs £12 million, can the extra £2 million be ‘found’ by developing in phases and spreading expenditure over a longer financial period? Projecting costs further forward still is equally critical to ensure value for money. The cost of owning and running a building over a period of years is usually much greater than the initial build cost. It is for this reason that the focus in purchasing is rapidly shifting to whole-life value. There is little point in specifying the lowest-cost air-conditioning system in a building with a 60-year design life if it has markedly greater maintenance requirements than a more robust alternative. It may be cheaper today but it will almost certainly prove more expensive over a period of a few years. Making whole life investment decisions is essential to achieving real value An integral part of the value-engineering process should therefore be whole-life-value assessments. Ideally, these will take account of not only build and maintenance costs but also a wider range of factors including quality, sustainability, social issues and factors such as how can design be expected to impact on personnel and business performance. Whole-life-value investment approaches also take into account the needs of a wider range of stakeholders than simply the construction team and require an understanding of the relationship between financial and non-financial value drivers — and how to overcome conflicts. The whole-life approach effectively balances the ‘triple bottom line’ of economics, environment and social sustainability. Traditionally, the tools for making this type of assessment have been hard to find. However, more recent work has resulted in the ready availability of guidelines and tools which at once demystify the process of whole-life value and simplify associated decision making. The recently published guide titled ‘Achieving whole life value in infrastructure and buildings’ (co-authored by Faithful & Gould) provides an index of decision support and assessment tools available and how to apply them. Whole-life value is integrally linked to value-engineering principles and adds to them by ensuring early identification of non-viable development options before money and time have been inappropriately spent. Taking this longer and, indeed, wider view of buildings and services holds the key to ensuring that value engineering genuinely delivers value rather than providing the wrong solution for the price we first think of. Andy Green is director, whole life value, with Faithful & Gould, one of the world’s largest project and cost management consultancies. Faithful & Gould employs over 2,000 staff with a turnover in excess of £120 million and has an expanding office base worldwide.
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