Value Management and Value Engineering - Essay Example

«Value Management and Value Engineering» Description of the project: The project proponent is SBE innovations, a partnership between a private developer and the public sector local authority. The project contemplated is a mixed-use recreation and commercial centre. Located in a suburban location, the project aims to stimulate development and enhance community life. The local authority aims to enhance the health, wellbeing and quality of life of the community, while the private sector partner seeks to earn a modest though comparable rate of return on its investment. Assumptions: There are several alternative features or elements that are being considered for the project. The mixed-use recreation and commercial centre may include multiple-use sports facilities, for both indoor and outdoor sports events. A youth’s centre may also be designated, with a play area for little children, and a gaming and internet facility for older youths. There shall also be an auditorium for cultural performance, and a multipurpose hall or function room that could accommodate events of the community, or which may be rented for private use. The support services for this centre shall be provided by both partners, with the public authority providing support through subsidies in the operating costs of the centre. Other than the centre, there are commercial areas which the private sector partner may lease out to interested commercial retail companies. These stores shall make available for purchase those popular foods, clothing, and shall provide the lessors and private sector partner an avenue by which to generate its revenues. Part 1 – Value Management and Value Engineering Report 1. Proposals for a strategic level Value Management study: 1.1 Benefits of applying VM at such an early stage to this particular project. Value management The use of VM early in the life cycle of a project provides benefits to the project proponents, the various stakeholders in the project, and project’s beneficiaries as well. Most important of these benefits is that the project’s planning and execution will be better aligned with the strategic aims and goals for which the project was undertaken in the first place. The iterative process in the VM framework, when applied to this particular project, will constantly bring to the attention of the VM team that each new adjustment in the plan should be measured against the enhancement of community life and welfare (i.e., the public sector objective), and the purpose of the private sector partner towards recovery of their investment with a satisfactory rate of return. This iterative process provides special application the more complicated a project is, because of the difficulty of the monitoring task. Furthermore, unnecessary functions and features, and incorrect assumptions regarding other requirements are gradually eliminated in the course of the iterative process (VGHI, 2010). In VM, this is accomplished by the assembly of a steering team who are tasked with the conceptualization, initiation, and evaluation of the project’s progress; this aids greatly in the systematic execution of the project plan. Furthermore, training programs to be conducted to foster value awareness, both at the top management level, and for corresponding levels of the organisation. Adoption of VM would likewise necessitate the conduct of specialised training programs to be administered among team leaders for the execution of specific tasks or functions in the project. Finally, a manager to be appointed to lead the VM panel shall perform stewardship function over the entire project (Jaapar & Bari abdul Karim, 2005). There are also benefits to be considered in the variation, Value for Money is the term used to denote the degree to which an organisation is able to obtain the maximum benefit possible from the services and goods it acquires and produces, given the resources within its control and which it can mobilise. It is focused on “three Es” – economy, efficiency and effectiveness (Imperial College London, 2010). 1.2 Specific project related issues that the VM study could focus on. The employment of VM normally raises the following issues, which also pertain to the present project. An important issue is that of the quality mix. In the suburban project planned, there are quality-bearing aspects such as the number and level of complexity of the project elements, given that its budget is limited and many of its elements are geared towards the community, which is admittedly a small population. The cost of materials and construction will always be an issue in VM, necessitating the choice among alternatives that tries to admit of both function and economy. In this project, this is particularly important because of the rather limited £9 million budget. Thus, the effectiveness and efficiency by which the use of resources may be employed is also a vital issue. A major issue is the fitness for the purpose for which the project is intended, and the timeliness of the project’s conceptualisation in meeting the community’s needs. It is further necessary to consider the convenience to the public in order to ensure maximum usage and patronage by the persons intended to be served by the project. Other issues for this project may include the matters dealing with sustainability and environment-friendliness; at time such allocations pursuant to these ends tend to have a high initial investment cost, but eventually the more expensive but more environmentally responsible methods will reap long-term benefits for the community. 1.3 Members of the VM study team study Members of the project team who should likewise be included in the VM study should include the project manager, for the apparent reason that the project manager is the person who steers the direction of operations, and must be so intimately concerned with the the architect and contractor who shall be hired to design the project as well as take charge of the execution of the project plans. The project controller or auditor is also helpful to include in the VM team in order for the proper financial targets to be defined and set, and for the appropriate accounting system and financing methodology to be employed. 1.4 Proposed agenda for the VM study The agenda for the proposed VM study include (VGHI, 2010; Kelly, Male & Graham, 2004): (1) Information gathering, to provide the contextual reference within which the project will be conceptualised. In this case, information shall be gathered about the community, the way of living of its citizens, the demographics including distributions according to age, gender, and income generating capability, (2) Functional analysis, which is the assessment of the conceived project in terms of the objective it is intended to fulfil, and the manner in which it is desired it should be fulfilled. For this project, there should be concrete ideas about how community life can be enhanced and how the project may contribute to the health and well-being of its public. Then the project shall be analysed as to the role the project could play in the attainment of these goals. (3) Creative speculation is the brainstorming process where the team members suggest possible alternatives that would comprise the elements of the project. Quite clearly, the creative speculation in this project involves the determination of those matters assumed – the auditorium, sports facilities, youth centres, and other elements that the VM team would deem worthy of inclusion in the project. (4) Evaluation of options is the stage where all the suggestions and speculations arrived at in the preceding activity are pitted against each other and the final elements decided upon. The VM team in this project must keep in mind that it has only £9 million in funds which it could use, and therefore in deciding which of the project elements to be chosen, the availability of funds to defray the initial investments needed to put the project elements online. (5) Preparation of the Action Plan and report will fulfil the documentary requirements, which ultimately will include: (a) Executive summary (b) Introduction and background (c) Participants (d) Key issues (e) Action list (f) Recommendations (g) Checklist 1.5 Tools and techniques that could usefully be applied in the study Some project management tools prove helpful in the present case: (1) Scheduling techniques – effective use of PERT-CPM and GANTT charts to ensure efficient timing and thus avoid penalties or costs associated with lost opportunities to earn revenues (2) Value chain analysis may secure or enhance the value of logistics and materials that are sources and employed (3) Since this is a partnership between a private developer and public local authority, it is just as important for the project to attain the ends of the public authority (i.e., the health, wellbeing and quality of life of its citizens) as it is to provide a return on the investment of the private sector. To more effectively achieve the public sector objects, a cost-benefit analysis is a necessary tool to determine which among the project elements will provide the greatest public benefit based on the most reasonable financial cost. (4) For the assessment of the return to investment, there is a need to conduct a capital budgeting analysis, utilising the various returns estimation tools (payback period, net present value, internal rate of return, profitability index) so as to compare with similar projects which may be considered benchmarks for the particular type of project. 2. Proposals for a follow up Value Engineering study: 2.1 Point in the project life cycle the follow up VE study should be applied for maximum benefit. Value engineering is an organized approach. The job plan to be undertaken in a value engineering study involves the following activities: (1) Information (2) Function (3) Creative (4) Analysis (5) Recommendation (6) Presentation and implementation (VGHI, 2010) Prior to the information gathering stage, there must already be a determination of the strategic goals and individual project elements that should be decided by the value management team. In this case, it may involve goal specifications for the sports facilities, youth centre, multi-purpose hall and auditorium, and the allocation for the commercial stores, after the VM team would have articulated the space, fixtures, and other attributes they would wish to include in the different elements. It is also likely that they may decide to add to those already mentioned. After the strategy is planned out and the manner in which the VM team wants this carried out, then the VE procedure may commence. 2.2 Who should be involved the VE study Among those who are expected to be in the VE team are the technical supervisors in the architectural, mechanical, electrical, structural, civil, and process activities of the project. Apparently, value engineering involves the appraisal of specific alternatives that will have an impact on the cost as well as the function of that element in the project. Practical knowledge of the construction alternatives and particulars could be possessed only by these technical specialists. There should also be representative of the financier, the operator, the user, the designer, the owner, and a value engineering expert who could guide the procedures. These parties represent the different interests in the completion of the project. The team member should be appointed from among them, preferably one who is familiar with the technical and organisational aspects, and who likewise is trained and competent in the VE process. 2.3 Elements of the scheme that may provide a focus for the VE study due to their potential for value improvement Among the elements of this that provide helpful focus for the VE study are the following: (1) Facilities design and configuration that would enhance multiplicity of uses and thereby maximise the utility of the centre. The more uses a particular facility is capable of being applied to, the greater the benefit-to-cost ratio. (2) Creative use of materials. Inasmuch as the budget is limited for the creation of the facility, resort to durable, less costly building materials, as well as fixtures and installations, shall prove a challenge to the VE study. (3) Spatial allocation adapted according to the needs of the community. The particular demographics of the community may provide a clue as to which facilities are best enhanced. A younger demographic would tend to enhance space allocation for those facilities pertaining to the youth. Wordcount = 2,000 excluding title Part 2 – Risk Management Essay Risk management has evolved into a major topic of interest in recent years, particularly in the construction industry. Increasingly, projects are evolving into undertakings where the effort is shared among multiple parties. Risk is unavoidable in all industries, but it is particularly pronounced in the undertaking of construction projects. Construction projects, in particular, are noted for their complexity since uncertainty emanates from various sources (Klemetti, 2006). Projects are large and are getting bigger, tending to become more complex and multidisciplinary (Ali, 2005). Thus, it is imperative that risks be identified and handles in the appropriate manner, in order to reduce the adverse effects brought by such risks. There are a number of risks identified with infrastructure construction, according to Perera, Dhanasinghe, & Rameezdeen (2009). Because the infrastructure projects involve horizontal construction design and execution, and such projects take a long time, are complicated, and are exposed to the elements, there are more sources of risks in infrastructure in comparison to other sub-sectors such as housing. These sources of risk include: acts of God; adverse weather conditions; changes imposed by the engineer; contractor competence; dealing with utility agencies; defective construction work; defective design; delayed payments; dependence on foreign funds; insufficient estimation; inflation; insufficiency of the preliminaries bill; late approvals; late handing over of the site; legislative changes (affecting the infrastructure subject of the construction); low labour and equipment productivity; relations with the neighbourhood; procurement of resources; public security and safety; regulations and difficulty in obtaining permits; scope change; tentative drawings; and unforeseen site ground conditions (Perera, et al., 2009:93). There are several methodologies that may be employed in risk management. The RMP (risk management process) methodology has seen successful application, since it provides more information on risk factors which management must be made aware of, in order to be guided in their decision-making function (Ali, 2005). Several of these factors are tangible economic indicators such as project cost, project schedule, project performance, net present value, or return on investment. Non-tangible factors can also be influential factors upon risk, such as corporate image, employee satisfaction, or increased customer service (Ali, 2005, pp. 20-21). In the management of projects, a quality and safety system must be in place, in such a manner as to be responsive to project risks, as well as to its costs and benefits. In infrastructure projects, the RMP is known as the “most logically consistent framework” by which risks can be identified, assessed as to their consequences, and analysed so as to identify the resources required to address the risk and mitigate it, if not totally eliminate it. It is one of the powerful tools in the arsenal of the risk manager in the infrastructure industry, noted for its quick response and effective control of risky situations (Ali, 2005). The RMP commences with identification of the strategic importance of the infrastructure project under way – its mission, aims and objectives. In the identification, measurement and assessment of risks, several specialised tools are employed to identify which risk factors could pose potential threat to the project at hand. Identification usually involves a statistical study of probability distributions in construction projects of this sort, and to use such models in the cognizance of critical success – and risk – factors. The risk evaluation phase, which follows risk identification, involves the enumeration of several alternatives to the decision-making process, and applying them to the risk profiles that were formulated during the earlier, risk assessment, phase, and allowing for remedial action should the project variances exceed that of normal expectations by a significant margin. Finally, the risk control and monitoring stage is when the project manager conducts a close examination of the manner in which the project has progressed, noting the deviations and estimating which corrective actions may be taken so that the desired objectives of the project may be achieved. It is in this stage that message is relayed to the senior management or owner concerning the status of the project and its accomplishment to date. Another tool of risk management employed in infrastructure projects is the Risk Analysis Method (ERA), a method designed particularly for construction projects. This method requires the base estimate that represents the cost pertaining to that part of the work conceived of as riskless, and thus unchangeable given the different contingencies that may occur. The known features of the project are priced first, on the basis of current price rates. At this point, risk identification is conducted in much the same way as RMP, with the aim of taking cognizance of those factors that may well affect the overall project costs. In ERA, the checklist approach is utilised. Upon completion of the risk identification, the risk measurement and assessment are thereafter undertaken, so as to determine what the maximum risk allowance remains and to calculate the average risk allowance that may be attributed for each of the factors. In comparing between the ERA method and the RMP method of risk assessment, it is evident that unlike the RMP which uses a cumulative probability distribution curve, the ERA final estimated costs are denoted by three points. It is not easily to determine, however, the chances that the three values will occur, or the probability that the most likely estimate will be realised. In short, both risk assessment methods are merely estimates, and depending upon the variability of current conditions, there is possibly no assurance that the calculate risks (and possible returns thereafter) may become possible, and to what extent. (Ali, 2005). That notwithstanding, the traditional method of risk estimation, which deals with the detection of the risk variables through an estimation of variability (percentage), pales in comparison with the newer, RMP and ERA models, particularly in large projects such as infrastructure construction. Some findings by Ali (2005) show the traditional method to have the following defects: (1) the percentage figure is arbitrarily estimated and is often not appropriate for the particular project; (2) there is a tendency for risks to be double counted, since some estimators are predisposed to include contingencies even in their best estimate, unlike RMP and ERA which use the risk-free estimate as their base model; (3) there is still a resulting percentage addition in a single figure prediction of final cost, falsely indicating a degree of certainty which in actuality is not justified by the methodology; (4) the traditional method emphasises only the possibility of a downside risk, and fails to indicated the potential for cost reduction; and (5) finally, it needs to divert attention away from time and performance or quality and safety risks (Ali, 2005, p. 26). Another point to consider is that some of the risks are either discovered or eliminate during that interim when the project moves from feasibility stage to construction stage. Allowances thus made for the risks that have become known or have been discharges should therefore be correspondingly adjusted, in order that more attention be devoted to the risks that remain unsolved. In the figure below is a graphical presentation of the manner in which actual expenditure, base risk estimate, average risk allowance and maximum likely risk allowance vary during the lifetime of the project. As previously mentioned, as the project nears completion, more and more risky scenarios are eliminated, until finally during the project’s conclusion, there is no risk that remains, as no uncertainties exist any longer. Figure 1: Change in base estimate, risk allowance, and expenditure with time (OGC, 2004:21) Risk management does not solely revolve around the statistics of probability of occurrence; it also necessitates the determination of their impact if they do occur, and how the organisation addresses this impact, to either eliminate or mitigate it. Risk management process that is implemented in a project should be shared by all who play a role in that project’s completion, thus knowledge about the process should be understood and adopted at all levels of the project team. It is also necessary that the risk register or monitor be subsequently and periodically reviewed and updated during the lifetime of the project. A risk management plan is not a mere appendage in project management; it is integral to it. There must be sufficient time and effort devoted to the determination of risk and the adoption of a risk management plan, so that it could be analysed, understood and properly addressed. Clients should not enter into any financial commitment, either to the project itself or to a major revision in an existing project plan, unless the project team has provided a full assessment of the risks, and can assure the client that management contingency measures are in place (OGC, 2004). Conclusion As generalisation to this report/essay, it should be remembered that risk and value management are closely interrelated and must always be accomplished in parallel. Strategic value management is carried out first, then risk management, in accordance with the various options considered during the strategic values management phase. One without the other will not sufficiently ensure the attainment of the optimal level of value (OGC, 2004). Wordcount = 1,500 References Ali, R 2005 “The Application of Risk Management in Infrastructure Construction Projects. Cost Engineering, August, vol. 47, issue 8, pp. 20-27 Cullen, S 2006 “Value Engineering”. Whole Building Design Guide. 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Accessed 26 October 2010 from http://lib.tkk.fi/Reports/2006/isbn9512281473.pdf Jaapar, A and Bari Abdul Karim, S 2005 “Value Management: In General.” Value News, Institute of Value Management Malaysia (IVMM), vol.1, March Office of Government Commerce (OGC) 2004 Risk and Value Management: Achieving Excellence in Construction Procurement Guide. Office of Government Commerce, Great Peter Street, London. Perera, B; Dhanasinghe, I; & Rameezdeen, R 2009 “Risk Management in Road Construction: The Case of Sri Lanka”, International Journal of Strategic Property Management, vol. 13, pp. 87-102 Pettit, P 2010 Identifying and Managing Risks on Healthcare Construction Projects. Protiviti Risk and Business Consulting, Inc. Accessed from http://www.protiviti.com/en-US/Insights/Featured-Articles/Documents/Identifying%20and%20Managing%20Risks%20on%20Healthcare%20Construction%20Projects.pdf Victorian Government Health Information (VGHI) 2010 The Value Management Process. Accessed 25 October 2010 from http://www.capital.dhs.vic.gov.au/capdev/PlanningEvaluation/ValueManagement/ValueManagementProcess/?ID=185 Read More