Value and Risk Management - Assignment Example

Value and Risk Management PART 1 – Value Management and Value engineering report Case: The Scenario SBE Innovations Ltd is a partnership formed between a private developer and public sector local authority for the purpose of developing a mixed-use recreation and commercial centre to stimulate development and enhance the local community. This is to be sited in a suburban location and there are no significant planning restrictions. The local authority partner’s aim is to enhance the health, wellbeing and quality of life of its citizens and the private sector partner’s aim is to achieve a return on their investment from the commercial aspects of the project. A budget of £9M for capital works has been established for the project. The initial pre-design brief is to create a hub that facilitates community involvement, improves health and education within the community, and stimulates commerce through business and leisure facilities. Both partners are keen to maximise Value for Money from the project and are open to innovative and creative interpretation of their brief to ensure a successful project. SBE Innovations are committed to a high quality scheme that will be fit for purpose for many years to come. The project is currently at a very early stage and the project team have not yet committed to any major decisions on the brief or design for the project. Report A project life cycle consists of five phases namely project initiation, planning, controlling, executing and closing. This project is at the initiation and planning stage. • Explains the benefits of applying VM at such an early stage to this particular project. There are various benefits of value management at early stage of implementation such as: a). It is beneficial for the confirmation of the need for a new project, b). Open discussions about objectives, c). It is beneficial for structured framework for evaluation and re-evaluation, d). It is helpful to improve the accountability with an established audit trail, e). It is helpful to provide alternative solutions, f). It is beneficial to make the decisions with greater confidence, g). This has a great potential for increasing value for money in the project, h). Maintain better understanding within the organization etc. (The Value in Design, as cited by Morledge, et al, 2006). The construction clients use value management for achieving best value for their investment, especially, where the projects require satisfying the needs of the clients in terms of functionality. In this case, this will help in achieving the objective of maximisation of value for money from the project for both the partners. Value management will help in meeting the objectives of value for money if it is utilised effectively throughout all the stages of the project development. In this case, the involved parties are very much depended on their consultants for the strategic advice. In this case, the more pressure is to maintain competitive edge. This needs more attention to the quality of the product and service. The increased need for techniques provide better value. Satisfying the needs of the customers is very difficult and this is one of the key performance indicators of the UK industry. The benefits of the value management are to manage the value. The value creation process starts from the channelling of raw materials and continued till the delivery of the final project. Value management is a structured process of debate between the designers and decision-makers during an intense short-term process. The first objective of value management in this case of SBE Innovations will be to develop a common understanding about the design problem and to achieve the design objective. Value means different things are different for members of the client organization. Value engineering technique is used when things go in a wrong way and spend excess money on particular project. It is better to take the right decisions for making the design at first time. Value management will help to explain the process in the initial phase of the SBE Innovations project. Sometimes, value management is used to integrate both procedures where value engineering is viewed as sub-process of value management. • Propose specific project related issues that the VM study could focus on. As a VM consultant, the first step would be value analysis for the entire project. Value analysis means, “an organized effort directed at analyzing systems, equipments, facilities, services and supplies for purpose of achieving essential functions at the lowest life cycle cost consistent with the required performance, reliability, quality and safety”, and this is also termed as Value engineering and Value Management (Demkin, 2008). Value management is a technique to address the actual needs. The need in the given case is to develop a plan through which the aim of enhancing the health, wellbeing and quality of life of related stakeholders. Any kind of over-specification, while permitting standards to be increased over time needs to be avoided in the given scenario. The principles of value management at a strategic planning level and its continuous use through out the project helps in minimizing the cost and enhancing the value of the entire project. The value management knowledge will help in enhancing the overall value of the project (Atkin, et al, 2009). This will help in achieving functional advantages of a project. Project can be made overt and evaluated consistently with a value system determined by the client, customer or other stakeholders. Basically, it is accepted on an international level that value management or the value methodology explains the whole service. Value engineering is another term which explains the particular parts of the service. “Value management or value engineering is a structured technique that attempts to determine, at an early stage prior to detailed design, the functions that the completed project is required to fulfil” (Cartlidge, 2009). As a value management practitioner, the role is to discuss the expected results with the stakeholders. An investigation of the required functions of a new project at the planning stage is always helpful in determining the overall objectives of the functions (Cartlidge, 2009). There is a clear difference in the term Value Management and Value engineering based on the functionality. VE is used when the functionality of product is clearly defined at the time of design phase. It is its limitations and another technique is developed to come out from these limitations i.e. value management. In the European industries, there is growing view of value engineering and this value engineering is a special case of value management. The uses of value management are similar as to value engineering but there is a scope of technique that makes it so different. Value management is a technique which is used at the early stages of a project and value engineering is a technique which is used during the later stages of a project. During a project many changes are taken place and there is maintenance of high level principles. So, the changes are tested against these principles and their appropriateness. Without such principles it is not possible for a project to fulfil the demand of the client. By having a benchmark against to test changes, a project team tries to fulfil the requirements of the client. Value management is verified to produce such benchmarks. Before starting the construction, good construction method is to be chosen. Good planning involves constructions sequence should be right to avoid delays and extra cost, investigates and managing the risks of a project and last, use value management to investigate the contribution of each part of the project to remove the waste and inefficiency. There should be a sufficient time for changes to fulfil the client’s requirement so that client can get fixed and firm prices for the work in a competition (Turner, 2007). When design engineers are presented with a concept of project, they use their decision procedure to understand the product and they think about the requirements of the customer. Based on this understanding and using principles of engineering, they design a product that is most advantageous for the customer. The decision process which is used by the design engineers, therefore, seldom uses functions, function logic diagrams and value based comparative analysis methods. If any important parameter missed in the design may affect the customer’s satisfaction with the product. In fact, design engineers focus firstly on better designs so that the cost of the project can goes down. Subsequently, design engineers may search an alternative design that may have greatest potential to raise the value. The value engineering method is useful if all the resources such as time, money and personnel expertise are properly used to meet the requirements of customer at optimum cost. Additionally, this method is also helpful to generate the creative solutions to widen the potential for attaining better value. Value engineering is used in design engineering because it gives suitable checks and balances to the existing process of design. In addition, after the completion of design process, there is an approach that uses the combination of design engineering and value engineering analysis escorts to project design. This project design has the potential to incorporate both the cost and value while producing the optimum product that the customer needs. Value engineering creates value through product design and post-project analysis for enhancing future projects as they are developed. Value engineering is beneficial to reduce the material procurement, engineering, and construction costs of the project (Integrating Cost and Value in Projects, as cited by Venkataraman, et al, 2008). The purchasing function is the most value enhancing function of any organization. The staff members of supply management focused on to generate cost savings and service and quality improvement for the organization. It must be necessary for them to search for strategic internal suppliers of the organization. It may be convenient to them to monitor the performance of purchasing function against defines standards, goals, and industry benchmarks. Use of value engineering techniques helps the firms to design better quality and cost saving product that first hits the shelves. Over the life of the product, this produces important savings and revenues as reducing the requirement for cost savings initiatives later (Wisner, et al, 2008). The reaction of a ground mass to an engineering process depends on engineering behaviours of the materials. Material behaviour is determined by testing the subject samples of materials. This arises as a consequence of engineering construction. The situation of the sample tested also of significance to the accuracy of the test result, which is influenced by the sample extraction and preparation (Price, et al, 2009). • Identify who from the project team should form part of the VM study team study and justify why they should be included. The construction manager or the project manager should be part of the study of the VM team. Since this project is a joint effort of Scenario SBE Innovations Ltd, private developer and public sector local authority, the value management team can ask the joint team to name the Project manager for the project that is responsible and accountable for the overall project. He would have knowledge and access to all the processes, schedule, costing and other aspects of the project. This person can be informative and contributing to the overall VM study. He can contribute in terms of providing useful information on various aspects of the project and at the same time he can help in understanding whether a specific action can be feasible or not with his expertise and experience. • Provide a proposed agenda for the VM study The agenda for the VM study will be to develop a comprehensive plan for the mixed-use recreation and commercial centre that offers a cost effective solution for the achievement of the overall objectives of the study. In the planning stage all the procurement related decisions can be determined for the SBE Innovations. Various processes and activities can be assessed on the basis of cost and value. A proper procurement plan for the needs of raw materials can be prepared that will help in reducing the overall cost. The wastage can be minimized and the inventory stocks can be kept to the minimum level, reducing any scope for wastages. With the use of value engineering the share of savings will increase without reducing the profits. There are three types of savings such as instant contract savings, concurrent contract savings and future contract savings. When all the three savings are covered in a contract, a normal procedure is to be adopted to measure the savings separately and to pay the total savings on the instant contract. This helps to negotiate a no cost settlement where the parties agree to accept it without changing the contract price. This technique is suitable when the share of government savings on the instant contract is roughly equal with the share of contractor’s saving on concurrent and future contracts. When the provision of sharing is excluded from the value engineering clause of a contract, no award for the excluded type of savings is due the contractor (Cibinic, et al, 2006). • Indicate any tools and techniques that could usefully be applied in the study The provision of value engineering is included in all construction sub-contracts and contracts. Value engineering items considered mandatory by the Board during the development of the bidding plans and specifications. If the mandatory items are not acceptable to the owner, there is a difference in cost among the value engineered and the inaugurated items will be borne by the owner (Office of the Federal Register (U.S), 2010). To understand the limitations of traditional project metrics, apply common practice of checking projects using a schedule and a financial report. The schedule discloses the activities started, completed, early or late in starting, and early or late in being completed. The schedule gives a general sense of current status of project and compare that each activity stands relative to its planned status. Therefore, the schedule does not differentiate with all types of activities, some efforts are small and some are large, some efforts are on the difficult path and some are not. Sometimes, the schedule may not in a position to give a qualitative sense of the project being ahead or behind schedule. But the schedule which is in quantifying condition is very difficult (Stratton, 2006). Regular evaluation of a project’s performance, cost and status is possible through the standard reports and benchmarking processes. The reporting tools can be designed and developed for each stage of project. By using the performance measurement technique, the future performance of a project can be measured. Due to this, right and preventive action is taken. This is helpful to ensure that the project is completed on a scheduled time and under its budget and scope. Value management is the best way that helps project manager to improve the efficiency of certain resources and these resources performed at higher efficiency levels (Dayal, 2008). PART 2 – Risk Management Essay The sector is the U.S. Housing construction sector. In the recent past, the supply of new houses in the market has increased whereas demand has gone down for the construction services particularly in the housing market. According to the U.S. Department of Labor (2010), “The term construction includes new work, additions, alterations, reconstruction, installations, and repairs. Construction activities are generally administered or managed from a relatively fixed place of business, but the actual construction work is performed at one or more different sites.” In order to understand risks of the housing construction sector, it is important to understand various variables of the U.S. economy. According to the report of World Bank, there has been considerable decline in the GDP of North America (-2.5%) during 2007-2009. The recovery of the GDP has been slow as in 2010 the recovery was 3.2% and it is expected that by 2011 it will be 2.4% (World Bank). The level of unemployment in the U.S. is 9.6% (World Bank). The commodity prices are reduced. The housing loans in the U.S. are available at low rates but it is still not able to attract the new buyers. The number of excess homes is more than 1.5 million. There was a steep decline in the US. Single family housing whereas for US multi-family housing experienced decline after the recent recession. Figure: U.S. Housing Starts (2000-2010) Source: Alderman, 2010 On the other hand, risk is defined in various ways by different authors and academicians. However the definition of risk varies from stakeholder to stakeholder and the parties involved. According to Dalziel, Skelcher, Petts & Damery (2007) risk vary among the stakeholders during the design process of any project itself. Each stakeholder has his own definition of risk that can have impact on him. “Professionally defined risks are those hazards that designers, contractors, and local government or other clients identify as ones that may lead to them being liable in the event of injury to public space users. These risks arise from the design of particular elements, or their installation and maintenance. The minimization of these risks may create trade-offs with other design considerations. Risks defined by the public are predominantly to do with personal security issues arising from the use of the space (such as mugging), rather than trip and fall hazards in the design. (Dalziel, Skelcher, Petts & Damery, 2007)” There are various types of risks like political, social, economic and technological risks associated with this sector. In the recent past this sector faced much of turbulence due to economic recession faced by the country. The economic recession resulted in lowering the demands of houses as it was projected. The debit crunch led to other problem where the loaning procedure is tougher than ever. The purchasing power per capita got reduced. People are more concerned about their job security and this is preventing them to invest in housing or spending freely. The risk for the private constructors is the changing cost of raw materials and labour. According to IBIS World (2010) there are three main types of risk in a construction industry i.e. structural, growth and external sensitivity risks. Structural risk consists of risk of the industry and its internal factors. This includes barriers to entry, competition, total exports and imports, life cycle stage and instability of industry. The growth risk consists of the risk associated with the future performance of the industry. This is evaluated on the basis of historical data and comparing it with present for the forecasting of future. The sensitivity risks are the external factors of the business environment of the industry such as economic recession, changing interest rates, government regulations and others. According to Hassanien and Adly (2008) construction sector is comparatively easily accessible market with not much excessive initial investment capital. However in the recent past the U.S. construction industry faced financial risk from the debt money and the non-payment risks in this industry has grown due to the economic condition of the country. The risks of construction industry are the risk of injury during the construction process, usability of the construction material, equipment and facilities, cost, lifecycle of the products, legal compliance and lack of innovative approach according to the needs of consumers. The owners’ designers and constructors’ try to minimize all the risk during the design and planning phase itself (W Zou, Redman & Windon, 2008). Risk can also be from the failure of meeting budgetary framework and failing to meet the deadlines. According to W Zou, Redman & Windon (2008) in order to minimize risk, it is necessary to evaluate all the possible risks in the designing and planning phase itself. Once the risks and areas are determined, individuals or teams can be made responsible to handle the risk situations. The risks can be minimized with the great deal of teamwork, accountability and responsibility. There needs to have strong control and management for all the risks. There are various ways risk management can be adopted in the construction sector. In order to avoid risk, decision makers study data related to expected and achieved outcome and client demands. The projects are usually classified on the basis of its specific features and resources are directed to it as per the initial project guidelines. The risk management plan can be based on the life cycle of the project. It is very challenging for the constructors and builders to manage the external risks such as changes in the economic scenario, government regulations and others. However the internal or structural risks can be avoided by adopting best practices, effective benchmarking strategies and adherence to the legal and regulatory requirements. Figure: Risk Management Source: Wood and Ellis (2003) The complexities of the construction processes are high that makes it very challenging for the managers to develop and implement any risk management plan for it. However each construction project and risks related to it are specified in the beginning of the project at the design stage itself. Most of the efforts are directed for achieving the overall efficiency and effectiveness in various processes. The reports enable understanding the gaps of the achieved and desired results of the construction process. There are various frameworks such as lean manufacturing, Green initiatives, Building Information modelling and others that provides effective framework addressing specific issue in the construction sector. It is very challenging to develop a risk management plan that can completely take care of all the risks of the construction sector. This is due to the complexities of the processes of the construction sector. References for Value Management Cibinic, John, Nash, Ralph. C, & Nagle, James. F, (2006), “Administration of Government Contracts,” CCH Incorporated, pp1414, available in Google Books. {Retrieved on Dec 13, 2010}. Cartlidge, Duncan, (2009), “Quantity Surveyor’s Pocket Book,” Butterworth-Heinemann, pp419, available in Google Books. {Retrieved on Dec 13, 2010}. Dayal, Sham, (2008), “Earned Value Management using Microsoft Office Project: a guide for managing any size project effectively,” J. Ross Publishing, pp228, available in Google Books. {Retrieved on Dec 14, 2010}. Demkin, Joseph. A, (2008), “The Architect’s Handbook of Professional Practice,” John Wiley and Sons, pp1027, available in Google Books. {Retrieved on Dec 13, 2010}. “Integrating Cost and Value in Projects,” chapter 12, (n.d), in Venkataraman, Ray. R, & Pinto, Jeffrey. K, (2008), “Cost and Value Management in Projects,” John Wiley and Sons, pp289, available in Google Books. {Retrieved on Dec 14, 2010}. Kelly, John, Male, Steven & Graham, Drummond, (2004), “Value Management of Construction Projects,” Wiley-Blackwell, pp369, available in Google Books. {Retrieved on Dec 13, 2010}. Office of the Federal Register (U.S), (2010), “Code of Federal Regulations, Title 46, Shipping, Pt. 200-499, Revised as of October 1, 2009,” Government Printing Office, pp524, available in Google Books. {Retrieved on Dec 14, 2010}. Price, David, George, & Freitas, Michael de, (2009), “Engineering Geology: principles and practice,” Springer, pp450, available in Google Books. {Retrieved on Dec 14, 2010}. “Service Specifications, Service Level Agreements and Performance”, chapter 9, (n.d), in Atkin, Brian & Brooks, Adrian, (2009), “Total Facilities Management,” John Wiley and Sons, pp328, available in Google Books. {Retrieved on Dec 13, 2010}. “Strategic Sourcing for Successful Supply Chain Management,” chapter 04, (n.d), in Wisner, Joel. D, Tan, Keah-Choon, & Leong, G. Keong, (2008), “Principles of Supply Chain Management,” Cengage Learning, pp576, available in Google Books. {Retrieved on Dec 14, 2010}. Stratton, Ray. W, (2006), “The Earned Value Management Maturity Model,” Management Concepts, pp176, available in Google Books. {Retrieved on Dec 14, 2010}. Turner, Rodney, (2007), “Gower Handbook of Project Management,” Gower Publishing, pp871, available in Google Books. {Retrieved on Dec 13, 2010}. “The Value of Design,” chapter 10, (n.d), in Morledge, Roy, Smith, Adrian & Kashiwagi, Dean. T, (2006), “Building Procurement,” Wiley-Blackwell, pp330, available in Google Books. {Retrieved on Dec 15, 2010 References for Risk Management Alderman G (2010) Construction Sector Developments United Nations Economic Commission for Europe 68th Session Market Developments in 2010 and Prospects for 2011 UNECE Timber Committee and the SWST retrieved on 12 December 2010 from http://www.swst.org/meetings/AM10/ppts/alderman.pdf Can Do, Will Do: Overseas Architects Are Helping Turn America's Construction Industry from Can't Do to Can Do. 2008. The Architectural Review, April, Dalziel, Robert, Chris Skelcher, Judith Petts, and Sarah Damery. 2007. Risk and the Design of Public Space: Implications for Local Governments1. Public Administration and Management 12, no. 4: 4 Fernández-Solís, José L. 2008. The Systemic Nature of the Construction Industry.Architectural Engineering and Design Management 4, no. 1: 31 Gerard D. Wood, Robert C.T. Ellis, (2003) "Risk management practices of leading UK cost consultants", Engineering, Construction and Architectural Management, Vol. 10 Iss: 4, pp.254 - 262 Hassanien, Amr A.G., and Samih W. Adly. 2008. Issues Facing Small Egyptian Construction Firms: The Financing Barrier. Journal of Small Business and Entrepreneurship 21, no. 3: 363-387 IBISWorld (2010) Municipal Building Construction in the US - Industry Risk Rating Report, Abstract only available at http://www.marketresearch.com/product/display.asp?productid=6037415&xs=r&SID=21890438-497280484-485351522&curr=USD Nadim, Wafaa, and Jack S. Goulding. 2009. Offsite Production in the Uk: the Construction Industry and Academia. Architectural Engineering and Design Management 5, no. 3: 136 .W Zou, Patrick X., Sonya Redman, and Steve Windon. 2008. Case Studies on Risk and Opportunity at Design Stage of Building Projects in Australia: Focus on Safety. Architectural Engineering and Design Management 4, no. 3/4: 221 Read More