Whole Life Costs vs Value Engineering

As a developer, you may be concerned about the whole life costs of your project, but equally if you intend to only fund the initial capital costs, why would you need to consider the life cycle costs of a building? You only want to build it, realise a return on your investment, and then move onto the next development. If this is the case, you may be more focused on value engineering in terms of achieving the same output and product but using more cost-effective means to do so.

However, considering factors such as Part L2 of the Building Regulations, BS ISO 14040 Life Cycle Assessment and Environmental Management, plus BS ISO 15686 Life Cycle Costing, you simply cannot ignore sustainability. Regardless of your approach to whole life costs, you must consider sustainability when undertaking a development, but is there a balance between administering the needs of whole life costs whilst incorporating value engineering where possible?

Whole Life Costs

The concept of whole life costs is to analyse the total costs of the project or asset, considering areas from planning through to design, post contract construction, sale and acquisitions, maintenance costs and any renewals over the life span of the building. There are also factors such as depreciation, plus the costs of any finance required before the eventual demolition and disposal of the asset.

There are many factors and considerations that go into whole life costs, and usually multiple stakeholders to account for too. The aim should be to build a development to the right level of quality and efficiency that will generate a greater resale value, as the occupier will enjoy lower running costs in the long term. This is of course dependent on the type of build, the lifetime uses of the asset, and other variable factors.

Another concept for review of whole life costs is value management, which identifies opportunities to maximise the value within a project. If you understand the requirements of all stakeholders, you should be able to distinguish between the elements that are essential and those that are variable. This will enable the project team to focus on long-term effective solutions that are cost effective whilst also considering the whole life costs.

Value management is generally best placed in a project development at the pre-construction phase, as the ability to realise the biggest benefit is before the design is finalised and procured ready to be constructed. It’s easier to consider the requirements of whole life costs when setting the specifications because, for example, if you decide to change at a later date, you may have to re-consult with all stakeholders in order to seek approval, which can become time consuming and counterproductive.

The downside of whole life cost analysis is that clients are very focused on the capital expenditure of building the project and not on the operational expenditure, which is also highly uncertain in a rapidly changing environment. For example, if you consider the current situation with retail developments and the move to online shopping, with landlords struggling to yield the rental that would cover the operational expenditure, it’s difficult for a developer to weigh up the stakeholder’s requirements at project conception versus what the market may do in the future.

Value Engineering

Value engineering is not about downgrading the end product in any way or reducing the scope and therefore reducing the performance of the asset. Value engineering is about removing any element that does not add value or increases costs but not performance.

The concept of value engineering began after World War Two where materials were in short supply and alternatives were needed to deliver the same function, but at a reduced cost.

In recent years, much focus has been on cladding to improve the building’s thermal capabilities and generally offer a facelift to older assets. However, through the ‘label’ of value engineering, many products offered were cheaper and from a financial perspective appealing, but in real terms did not meet the specification required.

Likewise, there has been a drive to standardise products across the industry, which is where you can realise real value engineering gains as the manufacturing process can reduce costs as opposed to being constructed in-situ. For projects that include concrete frames, switching to off-site prefabrication can save time and money from the slower process of on-site curing and connections and increased site management required.

By streamlining methods and techniques you can achieve the same end product with lower expenditure. However, if you contrast this to say the increase in costs to get a better system that will manage a buildings ventilation and heating, you can see the difference between value engineering and whole life cost analysis.

When should you use them to get the best benefit?

If you consider a whole life cost versus value engineering on a benefit/time axis, it’s clear that the earlier the decision is made, the more likely you reduce re-work and realise the maximum benefit. If you contrast this to making decisions late in the development when you are in a non-competitive situation where you have already detailed your requirements, making decisions and implementing them at the earliest possible stage is the obvious approach to take.

However, for value engineering, once you have the contractors expertise on board ready for construction, if they have any valid ideas that can genuinely save time and money whilst achieving the same end specification, why would you not consider this? However, it is vitally important that you do your due diligence if this involves any product changes or departures from the standards you have specified.

It may make sense to ask a contractor to review your design and the planned phasing of construction activities before you start your procurement. This early contractor involvement needs to be done at the right stage as to bring them in too early will mean they are unlikely to influence as they are not designers.

What obligations do you need to work to?

If you are considering selling a development, interested parties will want your life cycle costing in accordance with BS ISO 15686. The information produced in this format is then benchmarked against other projects on a global basis, enabling would be buyers to assess and evaluate market value. Life cycle costs consider the direct costs associated with cap-ex and op-ex, but they do not consider third party costs such as land and any revenue accrued from the building.

BS ISO 14040 describes a framework of how to complete life cycle costs, which allows for processes including how to detail inputs and outputs that can be used to analyse comparisons and aid decision-making. Similar to BS ISO 15686, the idea is that if a standardised framework is used, the information produced provides a good comparison across projects.

In regard to Part L of the Building Regulations, compliance is required in line with obligations on achieving the energy performance and carbon emissions of new and existing buildings. For a project to achieve the necessary consents, they must consider the long term energy usage of the building, which as noted above will mean that in accordance with other standards you need to review whole life cost.

What’s the best way to consider the options?

Adopting a structured approach to either value engineering or whole life costs using the framework described in standards is certainly the way forward. Identify the project stakeholders at the outset and then set up collaborative workshops that enable a constructive way to establish the functional requirements, technical requirements, financial viability, and an understanding of how this must be set against the environmental constraints. This approach will put you in good stead for construction phase delivery.

However, for such a workshop to work effectively, the parties need to be realistic and avoid starting with a wish list of items they are seeking to add to the project, but with zero tolerance to fund any increase. It must be viewed objectively by all parties and set against the framework for assessing whole life cost whilst retaining the option of value engineering.

Conclusion

To consider whole life costs, the client needs to be involved heavily from the outset to aid early decision making, which will support them to achieve the desired level of quality whilst meeting the regulations for efficiency.

Value engineering has a part to play and should be considered on all projects to eliminate any unnecessary costs by improving processes, techniques, programme efficiency, and to look at new innovative ways of working. The best way to approach is to review in three separate streams of planning, design, and methodology.

With regards to planning, this means reviewing the programme, the phasing, checking third-party activity durations, critical path analysis and sub-critical path analysis.

Design should look at solutions of buildability by reducing the time on site and therefore reducing running costs. This can be achieved through off site fabrication or reducing the number of connections.

The third and more tricky review is to pick out the function of the building and propose alternatives to the end client. However, this type of approach is more time consuming as any change in product needs to be carefully considered from a technical perspective before approval and implementation.

Feature image photo by Kevin Wolf on Unsplash

About Dean Suttling

A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.