Value management and value engineering report
For SBEinnovations Ltd to maximize on the value of its potential investment opportunity, it should apply value management (VM) at the introductory phase of the project. Value engineering (VE) will not bring about the desired results if the value management objectives have not been defined. Value engineering in this instance would be based on guess work, and may not serve its purpose.
Introducing VM at such an early stage ensures that the project proceeds in accordance with the available £9M budget, as well as meeting the needs of all stakeholders. VM requires that all the requirements of the potential stakeholders of a project be emphasized first before any major decision is made (Venkataraman and Pinto 2008, 159).
An early start to the VM program will bring together all parties that will be involved in the project. This enables the client to take advantage of networking with all professionals in the construction industry, which enhances collaboration. Early collaboration reveals alternative avenues of working, which may result in reduced project time and management costs.
Another benefit is that VM prevents, or minimizes, conflicts that may arise in later stages of the project, before they become problems. The cumulative effect of recognizing and implementing several modifications at an early stage will make a major contribution in terms of savings and future benefits. VM also looks at how design can be improved so as to increase value, in case of a construction project.
Discounts may be taken advantage of where supplies are bought in bulk in pre-determined amounts. Therefore, VM has a positive effect on cost savings, reduces waste and overall project time. VM also allows for a smoother handover among contractors during different stages of the project, which results in minor defects or time wastage.
The VM study should first establish overall project objectives. The local authority partner is clear on its targets, whereby it wants to improve on the quality of life for its citizens. This can be achieved if social amenities and infrastructure are focused on in the original plan. The private developer wants to maximize on the returns from their investment.
A key area to consider is the location of the project, which should be in an area close enough to a local community, but should also allow for future commercial developments so as realize potential future business opportunities. Prime land is also guaranteed to appreciate in value, so this should also be considered in the study. Another factor to consider is scheme of the project, that is, whether it is a build, operate or own scheme.
The concept of the project, as well as the design, should be formulated in early development stages. The VM team must review revenue sources for the project, potential risks, and concentration of expenditure before making any recommendations.
This team is to be made up of individuals who clearly understand the goals of the customer firm. They may be from within the organization or outside or from either the two. However, in a small project an individual can fulfill the needs of the team. This team assumes the managerial functions and makes the key decisions.
The value management team should include representatives from all stakeholders of the project. Selection and composition of the VM study group is of vital significance to the achievement of the program. The private developers have to be included since they, together with the local authorities, will be providing the funds needed for the completion of the project.
The design team and senior client representatives are the major participants during the briefing stages. After the briefing stage, the next stage of the project calls for a concept design. A project manager is brought into the team so to share knowledge and improve on the suggested designs. The study team should also include project sponsors.
This is a senior executive from the client organization who is in charge of developing and ensuring that the project to meets its end user needs.
The project sponsor organizes the customer’s input into the project; coordinate the customer’s managerial and routine functions, work together with key interested parties like shareholders and consumers, settle disputes on the customer side and act as the focus of contact for the study team.
Also the study team needs a client adviser. This should be an independent adviser, with vast experience in the construction industry, and ought to have an understanding of the customer’s organization requirements and goals, such as any special needs of the users.
This person is engaged at the commencement of the project. His duties are give independent direction on the best way to move forward. The same team handles the construction phase, once the suitable design has been approved.
A workshop agenda could be implemented, which involves pre-workshop preparation, workshop study and finally, a post-workshop implementation. The pre-workshop phase aims at establishing costs, developing creative ideas in a team, evaluation of ideas and identifying areas in which performance could be improved. Proposals drawn in this stage cover issues that have been discussed.
In the workshop, six important steps are followed; information step, function, creativity, evaluation, development and recommendation step. Information stage requires that all major participants understand the decisions that led to the design.
In the post-workshop phase, the participants study the VM report, and submit the findings to the owner and design team. Recommendations are also availed at this stage (Younker 2003, 246).
Some of the tools that can be used in the VM study include cost benefit analysis, hierarchy of objectives, process mapping and pair wise selection, to name a few. Cost benefit analysis is used to assess costs of implementing ideas, as compared with their benefits.
This technique is advantageous because it can be used with other tools. Objectives hierarchy involves identifying issues in a hierarchical form, which helps in focusing where input is needed the most. Pair wise comparison pairs all ideas and ranks them based on superiority.
This tool is useful in supporting the selection of one idea over the others. Process mapping involves flow charts to evaluate steps in the procedures. It can be a helpful tool in diagnosing processes, since they can identify omissions as well as other mistakes (Floyd and Allen 2002, 106).
Value engineering should be introduced in the implementation phase of the project design. It enables the creation of innovative answers for specific problems. With the contractors’ efforts, VE can proceed without any hitches so as to complement the design. VE involves a design team which is made up of contractors, architects and engineers, who are responsible for implementing and realizing the formulated designs. V
E could thus be used to analyze and predict the various outcomes. Before commencing on value engineering, it’s important to ascertain that the advantages of cooperation and coordination are understood. The study should also make sure that all parties stick to agreed terms.
Value engineering is beneficial since project improvements are not provided for in legal design standards. VE recognizes cost and worth mismatches so as to allow for informed decisions. Consequently, this will lead to cost and time savings.
Risk management
Construction projects are characterized as very complex undertakings, where risks and uncertainties come from all angles. A construction project involves very many interested parties such as investors and technocrats among others and this makes it difficult to study and predict the situation as a whole. But on the other hand, construction projects present a perfect situation for project and risk management research.
There are numerous risks that face the construction industry, which can be classified broadly as socio-economic factors, organizational relationships and technological problems.
Socio-economic factors include; environment protection contributes to project uncertainty since there is no definitive criteria on what are the requirements and time lag taken to get approval from the regulatory bodies; public safety regulations, which keep on shifting for the stakeholders as the project moves from planning to implementation, thus the constructors cannot schedule and budget their work; economic instability, deregulation of financial institutions, high inflation and interest rates and exchange rate fluctuations have greatly reinforced the riskiness of the industry.
Other socio-economic factors include interpretation of laws and regulations and acquisition of labor, equipment and supplies.
Organizational risks, though these may not seem so imminent but are real anyway, they may involve; disputed contractual relations; attitudes of participants; and communication.
Technological risks mainly focused on the designers and constructors, who have an influential control over the process. Due to the fast advancement of technology that brings in unanticipated challenges that can affect either of the project stakeholders, technology risks have become a major concern in many situations.
Having discussed these risks, construction companies need to balance the possibility of risk with their defined contractual, design and budgetary requirements. Risks linked to the construction sector essentially affect cost estimates, delay in time taken to complete the project and failure to accomplish the necessary quality requirements.
Human errors may also lead to damage of equipment and injury to construction workers. Financial risk can be brought about by inflation costs, shortage of funds or fluctuations in interest and exchange rates. Other risks factors include delay in supply of building equipment, ineffective designs and accessibility to skilled labor.
A recent study illustrates that in current years, contractors are more prepared to assume risks that come with contractual and legal problems through sharing risks with the owner and undertaking prior research (Kangari 1995, 63). Some of these risks involve order consultations, third party delays and contract delay. The study also established that contractors presently assume risks linked to definite job quantities.
Risk management in the US has gained more recognition over recent years. Companies that offer risk management services specifically to the construction industry, both in the private and public sectors have come up. These companies offer underwriting services with custom programs, and risk control services.
There has also been an increase in the number of people involved with real estate, as compared with early years when only estate agents, mortgage brokers and banks were involved.
Recently, other professional services have been set up so as to cater for the various needs of the industry, such as inspectors, insurance agents, land development, and property managers. Furthermore, liability documents are to be drawn, which include the participation of all main stakeholders.
The US housing industry is no exception to the mentioned construction risks. Furthermore, the country’s volatile economy in recent years has led to major price fluctuations in the housing market. The housing bubble in 2005 led to a sharp decline in property prices, which caused high foreclosure rates in the US.
Properties that were used to secure loans meant that could no longer act as collateral, and this had a negative impact on the bottom lines of financial companies. The US is also prone to immigrants, mostly from Latin America. Immigrants are known for their cheap labor, and therefore an attractive source of labor for many construction firms.
The use of immigrants in construction projects results to many accidents and injuries, since most of them lack experience and proper training. Lack of a clear understanding of the English language can also lead to accidents, due to misinterpretation of information. A translator could be employed to serve this purpose, which escalates the cost of production in the industry (Thompson and Perry 1992, 48).
Many construction companies evaluate risks individually, not realizing the potential effect that other related risks will have on their construction projects. An aggressive risk management strategy will allow the firm to categorize all of the company risks. This strategy will improve the chances of mitigating risks, and eliminating them. There are several strategies to manage risk in the construction sector.
Risks cannot be completely mitigated, though they can be channeled or pushed forward. Risk elimination, also referred to as risk avoidance, implies measures against proceeding with a project that is perceived as risky. A contractor may not place a bid, or the project owner may choose not to avail funding, thereby leading to total elimination of the risks.
Risks can thus be eliminated by tendering high bids, or specifying certain conditions during contract talks so as recommend which party will bear certain risks. A contractor can also avoid risk by not proposing to be involved in the high risk segment of the contract.
Two important features that construction companies consider are contractual risks and the insurability of projects. Contract and insurance evaluations are critical in the effectiveness risk mitigation strategies and construction schedules.
Insurance companies assume that risks will take place, and assess alternative ways of distributing or transferring the risk. In most cases, the eventual loss is transferred to the insurance company, based on their underwriting results.
Risks in the construction industry can be transferred in two alternatives. One way would be to transfer the high risk activity or property to another party, for example a sub-contractor, it is possible. The second option would be to retain the risky activity or property, but transfer the economic risk to an insurance company.
A key consideration is that not all risks are transferable, especially in the construction sector, because of their speculative nature. Rather than transferring the risk, the contractors could choose to retain it. A retention approach involves active management, whereby contractors carefully assess the potential losses and look for alternative measures for reducing the risk.
Risk reduction can be attained by constant management and maintenance of physical devices. Training construction workers in risk management will help in prevention of losses, and costs associated with managing those risks. Following agreed upon protocols in maintenance and safety will lead risk elimination.
References
Floyd, C. F. & Allen, M. T. 2002, Real Estate Principles, Dearborn Real Estate. New York, NY: Springer.
Kangari R. M. & ASCE, 1995. ‘Risk Management Perceptions and Trends of U.S. Construction’, Journal of Construction Engineering and Management, Vol. 121, No. 4, December 1995, pp. 422-429.
Thompson, P. J. & Perry G. 1992. Engineering construction risks: a guide to project risk analysis and assessment, 2nd ed. London: Thomas Telford.
Venkataraman, R. R., Pinto, J. K. 2008. Cost and value management in projects. London: John Wiley and Sons.
Younker, D. L. 2003. Value engineering: analysis and methodology. New York, NY: Marcel Dekker.