Value management and Life cycle costing

Introduction to Value Management

Value Management focuses to find a balance between the cost and performance of any project. In simple terms, it can be defined as care and attention to function provided better value for money. Comparatively it is a new concept to the construction industry and undertaken by various construction management professionals.

In VM exercise, firstly the expectation and functional requirement of client shall be identified and analyzed. Thereafter VM team shall find alternative options/design to fulfill requirement of client by taking consideration of buildability and life-cycle cost. (Detail explanation about LCC is given below).

Differences between Value Management and Cost management

There are clear differences found between value management and cost reduction which are discussed in below points.

  • Although value management can be used to make reduction in cost, mainly it is focusing on increasing the value, Cost reduction will be considered as the byproduct of value management.
  • Value management focuses on cost of life cycle whereas cost management focuses on the initial construction cost.
  • To conduct a Value management exercise expertise’s involvement is very vital, whereas cost management can be performed by unskilled labor by targeting low quality construction.

Timing of Value Review /Value Engineering

Although this exercise can be undertaken at any phase of the project, but to experience the maximum benefits, Value engineering need to be conducted at inception or early stage of the project. Precisely, Value management approach should be commenced prior to fund allocation for the project.

Benefits of the value management approach

  • It helps to understand the need and viability of the projects and shall be useful to identify required amount of flexibility to attain future needs.
  • Since this activity requires extensive participation of clients, it shall confirm the client’s satisfaction at its level best.
  • It gives chance to identify all available options and alternatives for a particular function ability and encourages to reach innovative designs.
  • It focuses to attain optimum value for money by considering with clear understanding of client’s needs and wants.
  • It confirms efficiency at work and giving importance to proper waste management approaches.
  • Since involvement of all parties is required from the initial stage of project, it creates a team morale in project.

Note: Although there are benefits, it takes more time to conclude the project, thus it shall increase the total cost of the project. In addition to that sometimes it may lead to conflicts amongst parties as well.

The following diagram summarizes stages of value management exercise.

Whole Life Costing/Life Cycle Costing

The lifecycle cost (LCC) is defined as the present value of the total cost of an asset over its operating life, including initial capital cost, occupation cost, operating cost and the cost or benefits of the eventual disposal of the asset at the end of its life. (RICS, 1999)

The above definition clearly interprets the process and concept of LLC. Early days of construction industry, construction professionals’ focuses on low initial cost. By going for the low initial cost of construction, later while using that particular project, clients may need to spend more money for energy and maintenance every year. Thus construction industry tends to work on LLC approach.

 

The following costs shall be considered and equation of LCC is also mentioned below.

stages of value management exercise

stages of value management exercise

  • Initial Cost (C) including acquisition and construction with consultancy charges
  • Energy cost (E)
  • Operational, maintenance and repair cost (M)
  • Replacement Cost (R)
  • Resale value (S)

 LCC = C + M + E + R – S

Factors to be considered/Assumptions on LCC

  1. The useful economic life of the project
  2. Required activities and frequencies of the activities as mentioned in operational, maintenance and repair cost.
  3. Budgeted cost of the item (2)
  4. Inflation rate and interest rate.

Advantages of LCC

  • It gives a complete picture about the project even at the initial stage, it will give information for decision making to client
  • It considers sustainability concept and care towards environment, in addition to that it follows the concepts of economics.

Although benefits shall be realized, it consumes more time to initiate the project and shall become void by the change in the external factors. As it is understood, quite amount of assumptions used, this exercise need to be undertaken carefully with the support of industry’s expert to realize the mentioned benefits above.

Note-  Calculation example shall be provided if it is requested by readers for both value management concept and LCC concept.

 

Written by Gowrinath.S  © BasicCivilEngineering.com

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