Value engineering: How to manage the process and limit the risk of VE
As an ideal, the underlying intentions of value engineering seem noble. Truly, discarding elements of a design that add extraneous costs but do not make a significant contribution to a building’s performance or appearance can be a useful tool when correctly utilized.
But in practice, value engineering (VE) is often a less than ideal experience, particularly for architects who may see some of their best ideas diminished or eliminated from the design. If the process isn’t disciplined, it can become an ill-disguised exercise in cost cutting, and the bottom line becomes the only beneficiary.
Changes proposed to a design create risk, including changes resulting from value engineering. This makes it especially important for architects to manage any changes that stem from the process. Should there be a material, structural, or mechanical failure as a result of implementing a VE-generated change, responsibility doesn’t usually fall on the owner or general contractor; it invariably becomes the architect’s and engineer’s problem.
Let’s discuss several ways in which architects can be more effective managers of value-engineered change, and thus minimize their exposure to risk.
Take a global perspective. Changing even one aspect of a design will affect other elements—and not always in obvious ways. If your project is being value-engineered, assuming a systems-wide vantage point will give you a more accurate picture of the implications of alterations. Changes to the design may end up costing the same—or even more—in the long run due to how these proposed changes affect other aspects of the project and what additional peripheral costs will be incurred by making the proposed change.
Evaluating change isn’t limited to material substitutions; there are layers of time-based analysis that must be done, as well. Think about life-cycle costs in a project that was originally designed to achieve LEED status, for instance. Factors such as energy usage and building operation costs will vary over the years, and while implementing a VE change may save money in the short run, the long-term application may not be sustainable in terms of LEED certification. In the end, the cost may be the same or only an insignificant savings may actually be realized. The value that is initially identified by VE may not actually be there after the change has been made.
Develop process checks. While it might seem mundane, this is one of the simplest strategies an architectural firm can take in shoring up its protection against ill-advised changes. Keeping complete, accurate records and organizing a project’s documentation demonstrates to all parties that you are on top of the design and construction process.
Be vigilant about quality. When deciding whether or not to approve a substitution, it’s imperative that architects be aware of the quality of the proposed change. Again, consider the risks involved in accepting VE-recommended changes; they can be devastating.
A few years back, one of our clients was involved with a hotel construction project. The original design for the building featured a fire-retardant façade. After value engineering determined that using a non-fire-retardant façade could shave $20 million off the cost of the job, this option was exercised. The general contractor selected a substitute material for the original façade, and the sub-consultant to the architect evaluated and approved the substitution. The new façade did not meet code standards.
Not too long before the hotel was scheduled to open, a fire destroyed most of the building. The fire did $80 million worth of damage to the property—thankfully, no one was hurt in the blaze. The cause of the damage was attributed to the fact that the façade was not code compliant. The building was underinsured and so was the design team. Because the owners’ insurance only covered $55 million worth of loss, lawsuits commenced. Since the architect’s sub-consultant had just $1 million worth of liability insurance coverage, the architects participated significantly in the settlement.
Are you ready to sign off on a new design solution that purports to offer the same quality for less money? To help manage this process, at Whitehorn Financial Group, we have developed a form for the general contractor to complete as a follow-up to value engineering. In this document, the specs for the original material and the proposed substitution can be compared side by side, so any differences in performance, cost, or quality can be clearly noted. This adds a level of accountability to the contractor’s role.
Know when to say no. Architects must have a strong sense of their own legal authority in managing a project, particularly when the VE process raises questions about the design. Changes that directly impact Health/Safety/Welfare (HSW) aspects of the design are not allowed; the owner may not proceed by law. For non-HSW issues, however, it is incumbent on the architect to refuse—in writing—changes deemed unacceptable to the architect. A letter (hard copy, not an email) from the architect, stating that the owner is proceeding at his or her own risk, should be quickly issued with a verified delivery.
Adhering to these professional standards of work will pay off in situations where value engineering has created a risk-filled environment. If applied diligently, you’ll minimize the risk of failure, as you enhance your own value as an architect for your clients.
About the Author: Steve Whitehorn is the author of the upcoming book, Ensuring Your Firm’s Legacy. He is Managing Principal of Whitehorn Financial Group, Inc., which helps A/E firms create more significant legacies and empowers them to achieve greater impact on their projects, relationships, and communities.
