KING FAHD UNIVERSITY OF PETROLEUM AND MINERALS

CEM-512 Value Engineering

Think Value Engineering

Prakash AcharyaCharles Pfrommer

Charles ZirbelJOURNAL OF MANAGEMENT IN ENGINEERING

Nov/Dec 1995 Vol.11 No.6

TABLE OF CONTENTSTABLE OF CONTENTS

1.1. IntroductionIntroduction

2.2. VE – RequirementsVE – Requirements

3.3. VE – Policies & ProceduresVE – Policies & Procedures

4.4. VE – ClausesVE – Clauses

5.5. VE – ProcessVE – Process

6.6. Case StudiesCase Studies

7.7. Summary & ConclusionsSummary & Conclusions

INTRODUCTIONINTRODUCTION

Value Engineering (VE) is a Proven Value Engineering (VE) is a Proven Management Technique used to:Management Technique used to:

• Identify Identify Alternative ApproachesAlternative Approaches for for Satisfying Project RequirementsSatisfying Project Requirements

• Lower Costs & Ensure Technical Lower Costs & Ensure Technical Competence in PerformanceCompetence in Performance

INTRODUCTIONINTRODUCTION....

Both Govt. agencies/Clients & Both Govt. agencies/Clients & Contractors are equally rewarded Contractors are equally rewarded by VE methodsby VE methods

Govt./ClientsGovt./Clients Life-Cycle Cost Savings

ContractorsContractors Higher Profit Margins Reputation as Low-Cost Provider of Quality Goods & Services

VE VE REQUIREMENTSREQUIREMENTS

• A A Clear ScopeClear Scope, coupled with , coupled with continuous interaction continuous interaction with with Client, from preliminary budget Client, from preliminary budget values through completion of the values through completion of the ContractContract

• Take into account both the Take into account both the necessary resourcesnecessary resources and the and the reasonsreasons that the project, and each that the project, and each individual phase of it, is requiredindividual phase of it, is required

VE VE REQUIREMENTS..REQUIREMENTS..

• The significance of VE must be The significance of VE must be addressed at an addressed at an early stageearly stage of of the projectthe project

• The better engineers understand The better engineers understand the the issues of valueissues of value (as perceived (as perceived by Client’s decision makers), the by Client’s decision makers), the better they can evaluate whether a better they can evaluate whether a decision is ultimately good or baddecision is ultimately good or bad

VE VE POLICIES & POLICIES & PROCEDURESPROCEDURES

• Policies & Procedures governing Policies & Procedures governing VE are presented in the Federal VE are presented in the Federal Acquisition Regulations (Acquisition Regulations (FARFAR) Parts ) Parts 48 & 5248 & 52

• FAR instructs the general use of FAR instructs the general use of a a VE clauseVE clause in supply or service, in supply or service, construction and AE contractsconstruction and AE contracts

VE VE POLICIES & POLICIES & PROCEDURES..PROCEDURES..

• FAR identifies the information FAR identifies the information that should be included in the that should be included in the Value Engineering Change Proposal Value Engineering Change Proposal ((VECPVECP), the definitions of various ), the definitions of various contractual terminologies used and contractual terminologies used and the Govt./Contractor sharing the Govt./Contractor sharing arrangementsarrangements

VE VE CLAUSESCLAUSES

1.1. INCENTIVE CLAUSEINCENTIVE CLAUSE• Contractor is encouraged to

develop, prepare and submit VECPs voluntarily

• Contractor’s return is a relatively large share of the savings and recovery of development & implementation costs if the VECP is accepted

VE VE CLAUSES..CLAUSES..

2.2. MANDATORY CLAUSEMANDATORY CLAUSE• Govt. requires and pays for a

specific VE program effort

• Contractor gets smaller share of savings because VE activities are priced into the contract

• This clause is used in contracts whose specifications are broad and the Govt. anticipates cost savings during performance

VE VE PROCESSPROCESS

• While implementing VE, an While implementing VE, an organizedorganized, , multi-disciplined multi-disciplined approachapproach should be used to should be used to create alternatives for client’s create alternatives for client’s considerationconsideration

• This process involves This process involves seven seven phasesphases

VE VE PROCESS..PROCESS..

1.1. Team SelectionTeam Selection

2.2. Information GatheringInformation Gathering

3.3. BrainstormingBrainstorming

4.4. Evaluating AlternativesEvaluating Alternatives

5.5. Developing AlternativesDeveloping Alternatives

6.6. Making RecommendationsMaking Recommendations

7.7. ImplementingImplementing

VE VE PROCESS..PROCESS..

Acceptance ofNew Idea and

Savings Sharing

CLIENT

CONTRACTOR

New Idea/Alternative

(VE)

Direct Communication Only

VE VE PROCESS..PROCESS..

1.1. TEAM SELECTIONTEAM SELECTION

• Consists of a Leader who supervises Team members, who are trained and have the expertise to develop VE ideas

• Team should consist of generalists and specialists who are free-thinking and flexible

VE VE PROCESS..PROCESS..

2.2. INFORMATION GATHERINGINFORMATION GATHERING

• Gather Technical & Cost-related information from Client, Vendors & Internal material from previous similar projects

• Sources of information also include Request for Proposal (RFP), Contractor’s proposal to Client, process and detail design documents

VE VE PROCESS..PROCESS..

3.3. BRAINSTORMINGBRAINSTORMING

• Based on the info. gathered, several cost-saving alternatives are discussed and documented in this creative phase

• Original design serves as a baseline to which alternatives are compared from a Technical & Cost viewpoint

• Innovative ideas develop out of experience, necessity & accident

VE VE PROCESS..PROCESS..

4.4. EVALUATING ALTERNATIVESEVALUATING ALTERNATIVES

• Select alternatives that have a high likelihood of providing cost savings and being implemented in the project’s design

• Each alternative should be ranked according to its potential to save money and be accepted by Client

VE VE PROCESS..PROCESS..

5.5. DEVELOPING ALTERNATIVESDEVELOPING ALTERNATIVES

• Each selected alternative is studied in detail to determine if it will yield the cost savings first aniticipated

• A detailed Life-cycle Cost Analyisis including capital, O&M cost, is developed for each alternative

VE VE PROCESS..PROCESS..

6.6. MAKING RECOMMENDATIONMAKING RECOMMENDATION

• The full developed alternatives are presented to the Team by the Team Leader

• The Team selects one or more recommendations to be reported to the Client

VE VE PROCESS..PROCESS..

7.7. IMPLEMENTINGIMPLEMENTING

• The Client may choose to implement one or more alternatives

• If VECP is accepted, the changes are implemented by the Contractor and the cost savings are shared by both parties

VE VE CASE STUDIESCASE STUDIES1.1. Bayou Bonfouca Project in Louisiana, Bayou Bonfouca Project in Louisiana,

involving U.S. Army Corps of involving U.S. Army Corps of Engineers and International Engineers and International Technology Corp. (IT), Knoxville, Technology Corp. (IT), Knoxville, Tenn.Tenn.

IT decided to approach Client with VE IT decided to approach Client with VE ideas after contract was awardedideas after contract was awarded

Significant changes were made in the Significant changes were made in the design of wastewater treatment plant, design of wastewater treatment plant, resulting in reducing both capital costs & resulting in reducing both capital costs & O&M costs by $4.4 millionO&M costs by $4.4 million

VE VE CASE STUDIES..CASE STUDIES..2.2. A Propellant & Explosives (P&A) A Propellant & Explosives (P&A)

incineration project for an Army incineration project for an Army facilityfacility

IT proved that the system cost could be IT proved that the system cost could be greatly reduced by an alternate design, greatly reduced by an alternate design, without compromising on performance or without compromising on performance or safetysafety

However, due to time constraints, the VE However, due to time constraints, the VE concept could not be implemented in the concept could not be implemented in the current project, but approved for futurecurrent project, but approved for future

SUMMARY & CONCLUSIONSSUMMARY & CONCLUSIONS• VE is a technique in which alternative VE is a technique in which alternative

technical & commercialtechnical & commercial means are means are identified and implemented for identified and implemented for complying withcomplying with required required specifications at reduced costspecifications at reduced cost

• VE is a proven concept that can be VE is a proven concept that can be applied on both applied on both Govt. & CommercialGovt. & Commercial projectsprojects

• Savings realized by VE concept can be Savings realized by VE concept can be in the range of in the range of 5-30%5-30% of original total of original total project costsproject costs