OPTIMIZING YOUR CONSTRUCTION INVESTMENT

THROUGH
"VALUE ENGINEERING"

By: A. J. Dell'Isola, P.E.

Director of Value Engineering Services
McKee-Berger-Mansueto, Inc.
1120 Connecticut Avenue, N.W.
Washington, D. C. 20036

Introduction
VALUE ENGINEERING
Value Engineering is a relatively new term Facilities Construction
(late fifties) which has been developed principal-
ly through the Department of Defense (DOD) with
emphasis on Cost Reduction and Systems concept.

The concept spread to the construction area

in the mid-sixties starting in the Naval Facilities
Engineering Command and then to other DOD construc-
tion agencies. Presently, this concept has been
adopted by Facilities Engineering Command (FECA)
of the Department of Health, Education, and Welfare, Total Cost Distribution
and the Public Buildings Service of General Services
Administration. The concept is a useful tool for
the construction manager in controlling costs, im- TOTAL COSTS OF OWNERSHIP -
proving cost effectiveness and in any trade-off
analysis required to complete a project.

Definition CONTRACTOR SUPPLIER M & 0 CONTRACTOR

Value Engineering is an objective, systematic

method of optimizing the total cost of a facility
or system for a specified number of years. Selects Procures Produces
Operates,
and and Maintains
Factors to be Considered and Replaces
Constructs Delivers
In the Value Engineering methodology, optimi- L
zation of costs are attempted by a systematic de- Figure 1
velopment of alternate proposals of isolated high
cost areas. During these efforts a number of of total cost including the "people" costs of the
factors are involved. A principal factor is the nurses, doctors, technicians, administrators, etc.
"Total Cost Concept." By total costs is meant the of a hospital over a twenty (20) year span.
ultimate costs to construct, operate, maintain and
replace a facility or system for a specified life
cycle. HOSPITAL LIFE CYCLE COSTS (20 Years)

facility
Figure 1, graphically
mate breakdown of the total
illustrates
costs of a typical
and where the owners money is spent over
the approxi-

Design
P (0.1X)
HELP!

1
a normal life cycle. It is interesting to note
that the initial costs are less than one-half the
total costs. The graphs typify the total cost of
ownership for your home and car, as well as the
cost of ownership of a typical facility. It is
the emphasis on first or initial cost, with the
resulting failure to take into account the total
effect of related cost elements, that is probably
the greatest shortcoming in today's planning,
programming, and design of facilities.

The graphs in Figure 1, do not include the

cost of the people involved in occupying the SYSTEM OPERATIONAL COSTS (7X)
facility. In some cases these costs are consider-
able. For example, Figure 2, is a chart which
indicates the appropriate magnitude of the areas Figure 2
1
 Figure 3, is an approximate curve which shows
whose decision governs the expenditures of funds.
It points out that the designer is the one whose
decision has the greatest impact on costs.
SlYlWOS POlENllll vs TIME
The construction contractor during his phase FICILITIES COSSlSU61lSW
can influence the cost of the installation only a
few percent. The maintenance and operations per-
sonnel during their phase can influence M&O costs
slightly, and the costs of the operating people
are fairly well fixed by the facility layout.

MAJORDECISIONMAKERS*
FACILITY COSTS

USING AGENCY
LIFE
Stmd*rds b Crit*ri*
CYCLE
h
COSTS
A

Figure 4

See Figure 5, "Decision Impact of Disciplines

on Total Building Costs." This Figure points out
TIME - LIFE CYCLE that each discipline's decision has impact on all
others. One cannot optimally design facilities if
- PERSONS WITH IMPACT ON TOTAL CGSTS each discipline is compartmentalized or if major
portions are sub-contracted out and performed in
isolation. Effective decisions involving total
Figure 3 costs require a multi-disciplined team knowledge-
able in all costs. The construction manager
should realize this and take actions to assure
more effective decisions.
Figure 4, is a graph which represents savings
potential versus time. It graphically illustrates In addition, the construction manager should
the greatest savings potential occurs during the recognize that the conventional approach has tended
development and design phases. The construction to limit the ability of the design personnel to
manager should recognize these facts and allocate develop and utilize creative problem solving
major efforts toward optimizing cost effectiveness techniques.
during the initial design phases of a project.
Value Engineering - A Fresh Approach

The Conventional Approach How can the VE approach be applied to the

design of facilities by construction managers?
The present method of design for a facility
involves principally the designer developing plans First, it is their responsibility to become
and specifications which conform to the design familiar with these new concepts. They should
criteria of the owner. realize that both time and money must be allocated
to achieve results. The magnitude of the effort
need not be large, ranging from 0.1 to 0.3 of a
In essence, what normally occurs is that each percent. The effort should be conducted at a time
discipline ends up generating requirements, review- when design criteria can effectively be challenged.
ing these requirements, establishing and modifying A team should be gathered which has access to
their particular criteria, even the standards and operational and maintenance costs. The team effort
criteria of the owner. This approcah usually should be directed solely at seeking out high cost
results in decisions which are not the most or poor value areas using life cycle costing, and
economical for the end function of the facility. to develop lower cost alternates. The effort should
Instead, this approach fosters or encourages supplement normal methods and provide decision
economical decision within each area with maximum makers with better information to make more effec-
safety factors deemed necessary by each discipline. tive selections. The efforts are more effective
Although this system is not totally without merit, when supervised by a full-time specialist. How-
it tends to sacrifice end system performance by ever, meaningful results can be achieved by part-
maximizing sub-system performance. The result is time efforts formally applied by individuals
total life cycle costs are not adequately considered. trained in the Value Engineering methodology.
2
 Figure 7 outlines the principal points of these
Decision Impact incentive provisions. It should be noted that con-
of tractor's are contractually allowed sharing.
Disciplines Savings to be calculated on the basis or reduction
in the initial contract and the proposal, called
Value Engineering Change Proposal (VECP), must
on require a change to contract documents.
Total Building Costs
PRINCIPAL POINTS OF CLAUSES

* Allows Contractor Sharing

Architectural * Proposals Made After Award - Not Before

Basic of Bid is Existing Plans and

Specifications

* Value Engineering Change Proposals [VECPs]

Must Effect a Change to the Contract

* Proposals Not Subject to Disputes Clause

Jote: Chart Based on Typical Commercial Hi-Rise
)ffice Bldg. Impact Will Vary by Type ofStructur# Government Decision Final

Figure 7
Figure 5
In addition to the DOD Agencies, the Public
Buildings Service of the General Services Adminis-
As a minimum effort, a 40 hour workshop should tration is including incentive provisions in their
be conducted during the initial design phases. The construction contracts. As a result, the recent
training of key individuals will have a follow-on construction management contracts they have awarded
benefit of increasing cost sensitivity and improv- will be required to place incentive provisions in
ing communications throughout the length of the contracts over $100,000. Figure 9 is a copy of the
project. contract provision.

Secondly, incentive contracting should be used As for results, Figure 9, is a summary of the
wherever feasible. The Department of Defense has results realized by the U. S. Army Corps of Engineers
directed the Armed Services, through Armed Services for the past seven years. The approval rate for
Procurement Regulation No. 17, to use Value Engineer- VECP's has been over fifty percent with the sharing
ing incentive provisions in contracts. Figure 6 percentages varying between fifty and sixty percent
for the contractor.
outlines the basis of these provisions.
These results should impress the construction
manager. They point out that any additional costs
incurred by formally applying the value engineering
methodology should be more than offset by "hard"
savings possible through placing incentive provisions
in the construction contracts.

Value Engineering Application Techniques

The following is an outline of the job plan

approach for the construction area:

A. Information Phase

1. Items required

a. Owner requirements given to A&E

b. Plans and specifications
C. Cost estimates available
d. Design data
e. Applicable standards and criteria

2. Steps

a. Breakdown of data in workable area

b. Functional evaluation of areas
Figure 6 C. Tentative high cost idea listing
3
 .

GENERAL SERWCES ;X.BMI1iNiS?-RATION

PUBLIC BUILDINGS SBRVICE

SECTlION 001.5
VALUE ENGINEERING INCXNTIVE CLAUSE

1. INTENT AND OB]ECTiilES---This clause applies to 3.3 An estimate of the effects the VECP would have on
any cost reduction proposal (hereinafter referred to as a collateral cos:s to the Government, including an estimate of
Value Engineering Change Proposal or VECP) initiated and the sharing that the Contractor requests be paid by the Gov-
developed by the Contractor for the purpose of changing any ernment upon approval of the VECP;
requirement of this contract. This clause does not, however, 3.4 Architectural, engineering or other analysis in suffi-
apply to any such proposal unless it is identXed by the cient detail to identify and describe each requirement of the
Contractor, at the time of its submission to the Government, contract which must be changed if the VECP is accepted,
as a proposal submitted pursuant to this clause. with recommendation as to how to accomplish each such
1.1 VECPs contemplated are those that would result in change and its effect on unchanged work;
net savings to the Government by providing either: ( 1) a 3.5 A statement of the time by which approval of the
decrease in the cost of performance of this contract, or; (2) VECP must be issued by the Government to obtain the
a reduction in the cost of ownership (her&after referred to maximum cost reduction during the remainder of this con-
as collateral costs) of the work provided by this contract, tract, noting any effect on the contract completion time or
regardless of acquisition costs. VECPs must result in savings delivery schedule; and,
without impairing any required functions and characteristics
3.6 Identification of any previous submission of the VECP
such as service life, reliability, economy of operation. ease of including the dates submitted, the agencies involved, the
maintenance, standardized features, esthetics, fire protection
numbers of the Government contracts involved, and the pre-
features and safety features presently required by this con-
vious actions by the Government, if known.
tract. However, nothing herein precludes the submittal of
VECPs where the Contractor considers that the required 4. TROCESSINC PROCEDURES-Six copies of each
functions and characteristics could be combined, reduced or VECP shall be submitted to the Contracting Officer, or his
eliminated as being nonessential or excessive for the function duly authorized representative. VECPs will be processed ex-
served by the work involved. peditiously; however, the Government will not be liable for
1.2 A VECP identical to one submitted under any other any delay in acting upon a VECP submitted pursuant to this
contract with the Contractor or another Contractor may also clause. The Contractor may withdraw, in whole or in part,
be submitted under this contract. a VECP not accepted by the Government within the period
specified in the VECP. The Government shall not be liable
2. SUBCONTRACTOR INCLUSION--The Contractor for VECP development cost in the case where a VECP is
shall include the provisions of this clause, with the pre- rejected or withdrawn. The decision of the Contracting
determined sharing arrangements contained herein, in all Olfjcer as to the acceptance of a VECP under this contract
first-tier subcontracts in excess of $25,000 and any other sub- shall be final and shall not be subject to the “Disputes” clause
contracts which, in the judgment of the Contractor is of such of this contract.
nature as to offer reasonable likelihood of value engineering
4.1 The Contracting Officer may modify a VECP, with
cost reductions. At the option of the first-tier Subcontractor,
the concurrence of the Contractor, to make it acceptable.
this clause may be included in lower tier subcontracts. The
If any modification increases or decreases the savings result-
Contractor shall encourage submission of VECPs from Sub-
ing from the VECP, the Contractor’s fair share will be de-
contractors; however, it is not mandatory that VECPs be
termined on the basis of the VECP as modified.
submitted nor is it mandatory that the Contractor accep:
and/or transmit to the Government VECPs proposed by his 4.2 The Contracting Officer may accept, in whole or in
Subcontractors. part, a VECP submitted pursuant to ihis clause by giving
the Contractor written notice thereof reciting acceptance
3. DATA REQUIREMENTS-As a minimum, the follow-
under this clause. However, pending issuance of a formal
ing information shall be submitted by the Contractor with
change order or unless otherwise directed, the Contractor
each VECP:
shall remain obligated to perform in accordance with the
3.1 A description of the difference between the existing terms of the existing contract.
contract requirement and the proposed change, and the com-
4.3 An approved VECP shall be finalized through an
parative advantages and disadvantages of each ; including
equitable adjustment in the contract price and time of per-
justification where function or characteristic of a work item
formance by the issuance of a change order pursuant to the
is being reduced;
provisions of this clause bearing a notation so stating. Where
3.2 Separate detailed cost estimates for both the existing an approved VECP also involves any other applicable clause
contract requirement and the proposed change, and an esti- of this contract such as “Termination for Convenience of the
mate of thq change in contract price including consideration Government,” “Suspension of Work,” Changes,” or “Differ-
of the costs of development and implementation of the VEC? ing Site Conditions” then that clause shall be cited in addi-
and the sharing arrangement set forth in this clause; tion to this clause.

1 GSA FORM 2653 B-711

Fig. 8 (cont’d)

4
 5. COMPUTATIONS FOR CHANCE IN CONTRACT For the purposes of sharing under this clause. thr trrm “in-
COST OF PERFORMANCE-Separate estimates shall be Stan: contract” shall not inrludc any rhangrs to ,,r other
prepared for both the existing contract requirement and the modifications of this contract. executed subrcquent to ar-
proposed change. Each estimate shall consist of an itemized ceptance of the particular VECP. by which the Covrrnn,cn:
lrrakdown of all costs of the Contractor and all Subcontrac- increases the quanti:y of any item of work or adds any item
tom’ work in sufficient detail to show unit quantities and of work. It shall. howcvcr. inciudc any ,~stcnsio,, ,,I the
costs of labor, material, and equipment. instant contract through exercise of an option tif any1
5.1 Contractor development and implementaLion costs provided under this rontrart after acceptance of the VECP.
flu the VECP shall be included in the estimate for the pn,- 7. I Whrn only the prime Contractor is involved, hc shall
posed change. However, these costs will not be alk,wal,lc rc*ceive 50’$ and the Government 5070 of the net rrduction
if they arc otherwise reimbursable as a direct rhargc under in the rest of pcrf,,rmanre of this contract.
this contrart.
7.2 When a first-tier Subcontractor is involved, he shall
5.2 Government costs of processing or implementation of
receive 3O’%, the prime Contractor 30% and the Govern-
a VECP shall not be included in the estimate. merit 40% of the net reduction in the cost of performance of
5.3 If the difference in the estimates indicate a net reduc- this contract. Other Subcontractors shall receive a portion
tion in contract price, no allowance will be made for over- of the first-tier Subcontractor savings in accordance with the
head, profit and bond. The resultant net reduction in con- terms of their contract with the first-tier Subcontractor.
tract cost of performance shall be shared as stipulated here-
7.3 When collateral savings occur the Contractor shall
inafter.
receive 20% of the average one years net collateral savings.
5.4 If the difference in the estimates indicate a net in-
crease in contract price, the contract price shall be adjusted 7.4 The Contractor shall not receive instant savings or
pursuant to Clause 23 of the General Conditions of this collateral savings shares on optional work listed in this con-
contract. tract, until the Government exercises its option to obtain
that work.
6. COMPUTATIONS FOR COLLATERAL COSTS-
Separate estimates shall be prepared for collateral costs of 8. DATA RESTRICTION RIGHTS-Tine Contractor nag
both the existing contract requirement and the proposed restrict the Government’s right to use any sheet of a VECP
change. Each estimate shall consist of an itemized breakdown or of the supporting data, submitted pursuant to this clause,
of all costs and the basis for the data used in the estimate. in accordance with the terms of the following legend if it
Cost benefits to the Government include, but are not limited is marked on each such sheet:
to: reduced costs of operation, maintenance or repair, ex- The data furnished pursuant to the Value Engineering
tended useful service lift, increases in useable floor space,
Incentive Clause of contract shall
and reduction in the requirements for Government furnished not be disclosed outside the Government, or duplicated,
property. Increased collateral costs include the converse of used, or disclosed in whole or in part, for any purpose
such factors. Computations shall be as follows: other than to evaluate a VECP submitted under said
6.1 Costs shall be calculated over a 20.year period on a clause. This restriction does not limit the Government’s
uniform basis for each estimate and shall include Govern- right to use information contained in this data if it is
ment costs of processing or implementing the VECP. or has been obtained, or is otherwise available, from the
6.2 If the difference in the estimates as approved by the Contractor or from another source, without limitations.
Government indicate a savings, the Contractor shall divide If such a proposal is accepted by the Government under
the resultant amount by 20 to arrive at the average annual said contract after the use of this data in such an
net collateral savings. The resultant savings shall be shared evaluation, the Government shall have the right to
as stipulated hereinafter. duplicate, use, and disclose any data reasonably neces-
6.3 In the event that agreement cannot be reached on the sary to the full utilization of such proposal as accepted,
amount of estimated collateral costs, the Contracting Of- in any manner and for any purpose whatsoever, and
ficer shall determine the amount. His decision is final and is have others so do.
not subject to the provisions of the “Disputes” clause of this In the event of acceptance of a VECP, the Contractor
contract. hereby grants to the Government all rights to use, duplicate
7. SHARING ARRANGEMENTS--If a VECP is accepted or disclose, in whole or in part, in any manner and for any
by the Government, the Contractor is entitled to share in purpose whatsoever, and to have or to permit others to do SO,
instant contract savings and collateral savings not as alterna- data reasonably necessary to fully utilize such proposal on
tives, but rather to the full extent provided for in this clause. this and any other Government contract.

2 GSA Form 2653 (8-71) (Back)

-
Figure 8

5
 See attached functional evaluation worksheet
Figure 9a for a Pencil which outlines the function, SAVINGS FROM VECP'S
cost and worth approach so vital to the successful
ARMY CORPS OF ENGINEERS
application of the VE methodology. In addition,
Figures 10, 11, and 12 are attached as other [Gov't Share Only]
examples of different types of functional analyses
techniques applied to construction.
NUMBER
FY MILITARY CIVIL TOTAL APPROVE1
65 $116,700 $ 140,600 257,300 48
B. Speculative Phase
66 107,600 199,000 306,600 80
1. Steps
67 259,600 402,100 661,700 140
a. Team review and generation of a com-
prehensive idea listing by study team 68 505,700 526,600 1,032,300 183
b. Brainstorming and review of idea list-
ing by study teams and owner or his 627,000
69 1,252,OOO 1,879,OOO 324
representative
C. Development of final idea listing 70
450,000
540,000 990,000 232
725,000
71 848,000 1,573,ooo 285

Figure 9

WORKSI-1EET 2a

ORIGINAL
COST

$0.07:
0.01

Figure 9a

6
 Figure 12

C. Analytical Phase

1. Steps

a. Evaluation of total listing and selec- 2. Review and revisions of proposals

tion of high cost areas from idea list-
ing for study
b. Breakdown of selected ideas for in- 3. Preparation of final proposals
depth analysis
C. Brainstorming and investigation of
areas isolated 4. Submission of report
d. Review and revisions
e. Preparation of proposal drafts

Figures 13 and 14 represent typical examples of

design type changes performed through actual studies.
D. Proposal Phase As for potential program results of an organized VE
approach, Figure 15, lists the recent results obtain-
1. Review of results of analytical phase with ed from studies conducted within a construction
owner or his representative to gain addi- program of a Federal Agency. The results indicate
tional pertinent information and enhance a savings potential of up to ten percent of total
implementation. program costs are possible.
8
Figure 13a
9
 E3LE-YATOI3S

COMPUTER FAC 1 LI TY $ 503,oo 3.7 $ 92,000 37 $ 85,000

PHOTOGRAPHIC LAB, 500,000 25 67,OOcl 4 32,OQO
INSTRUMENTATION
LAB, 900,000 41 374,000 6 73,OOO
OFFICE BUILDING* 2,600,000 32 486,000 8 65,00!?
OFFICE BUILDING 3,600,OOO 43 907,000 14 490,000
COMPUTER FACILITY” 2,050,OOO 44 34G,OOO 8 20,000
CHEMICAL LAB.” 1,525,OOO 29 183,700 6 38,600

TOTAL I $11,675,000 I $2,255,700 $803,600

TOTAL COST FOR VE STUDIES
INCLUDING MANAGEMENT BRIEFINGS -- $lOO,OOO-I-
* EVIEW LIMITED TO EXPANDED IDEA LISTING
B NO INDEPTH STUDY),
Figure 15
10
 USURYZONE

VALUE AS LOVER 8 HOUSEI:E~ER

SPOUSE sLt#ERY ZONE

Figure 16

Conclusion

Value Engineering is a proven tool to cost The new concept of construction management
reduction. In fact, today over 300 full-time requires new thinking to reduce unnecessary costs.
specialists are working in the Department of One new thought is worth considering. If you could
Defense in this area, Other government agencies, receive additional overtime salary to use the VE
such as the Facilities Engineering and Construction approach and could realize ten percent of any
Agency of the Department of Health, Education and savings you could generate during this period,
Welfare, and Public Buildings Service of General do you believe you could turn out more economical
Services Administration, and the Coast Guard of designs?
Department of Transportation, have adopted the
concept. Various state governments, the first
being Massachusetts, have established programs. If the answer is yes, efforts should be allo-
cated toward establishing a formal VE program on
In the private sector, many major product the projects being managed.
manufacturers have adopted full-time programs.
Foremost among these firms are: Minneapolis- NOTE: The Value Analysis approach has application
Honeywell, Joy Manufacturing, General Electric, to many different types of problems. Reference
Philco-Ford, Lockheed, Sylvania and Radio Corp- Figure 16 the Life Cycle Cost and Value Analysis
oration of America. of Childless Marriages.
11