Value Engineering, Reduce Post-Construction Operating Costs.

Best Way to Explain Value Engineering

The best way is to compare it to cost reduction analysis.

There is one fundamental difference between a cost reduction analysis and a value engineering analysis. Value engineering analysis includes some post-construction operating expenses and cost reduction does not. So what are they and how are they calculated? Let's take a look.

Cost reduction only evaluates the cost of construction in its analysis. It primarily looks for changes that can be made to the design that will cut the cost of construction, usually without reducing square footage or overall scope. Cost reduction normally focuses on types and quality of materials and components. Other than maybe waiting for prices to drop, cost reduction analysis does not enter time into it's equations.

Value engineering on the other hand applies the impact of changes proposed in cost reduction to post-construction facility operating, maintenance, and life cycle expenses. To better understand this, let's look at a simple example. Before we do it should be noted that if the facility being anlyized involves manufacturing, then along with the impacted expenses just mentioned, impacts to production expenses are also figured into the analysis. However, to keep our example simple, we won't include any of them. Now the example.

Example of Value Engineering

Let's say you are managing the design and construction of an office building. After the owner reviews the estimate he says it's too much and asks you to analyze the design and come up with a cost reduction proposal that keeps the same amount of square footage, but reduces the estimated cost of construction. So you pull your design team together and come up with the following list of changes to cut construction cost.

1 Eliminate low-e window glass coating $5,000
2 Eliminate window shades $5,000
3 Eliminate radient barrier in exterior skin $5,000
4 Reduce quality of air conditioner $5,000
5 Reduce size of air conditioner $5,000
Total Reduction: $30,000
$30,000 could be a big savings for this project and the proposed changes might also make sense in cooler parts of the world or if the owner intends to sell the building right after construction. It makes even more sense if he has a buyer that is willing to pay the asking price, even with the proposed cuts. But, in most cases, would having a building with those design changes be wise for either owner? I don't think so! Here's why.

The wise owner will also be concerned about the long term cost effects of these particular changes and ask for a value engineering analysis instead of a cost reduction analysis. The first part of a value engineering analysis actually is a cost reduction analysis. The second part estimates what increases there would be in the facilities operating expenses that are a direct result of the proposed changes. So let's look at what the increases are and then analyse the cost impacts.

  1. Increased power bills as a result of AC running more because non-Low-E coated glass doesn't limit the light producing thermal energy that enters the facility through the windows.

  2. Increased power bills as a result of AC running more because there are no shades to limit the light producing thermal energy that enters the facility through the windows.

  3. Increased power bills as a result of AC running more because there is no radiant barrier to limit the thermal energy that enters the facility through exterior walls.

  4. Increased repair expenses because of lower quality AC unit.

  5. Increased repair expenses because of undersized AC unit being overworked.
As you can see so far each of the changes has an impact on post-construction operating expenses. Now let's list the cost impacts, but we're are going to show them as negative numbers because they're considered a loss against the original cost reduction gain.

Description Year 1 Year 2 Year 3 Year 4 Year 5 Total
1 Non-Low-E Glass ($3,000) ($3,000) ($3,000) ($3,000) ($3,000) ($15,000)
2 No Shades ($3,000) ($3,000) ($3,000) ($3,000) ($3,000) ($15,000)
3 No Radiant Barrier ($3,000) ($3,000) ($3,000) ($3,000) ($3,000) ($15,000)
4 Repairs Due to Low Quality AC ($3,000) ($3,000) ($3,000) ($3,000) ($3,000) ($15,000)
5 Repairs Due to Undersized AC ($3,000) ($3,000) ($3,000) ($3,000) ($3,000) ($15,000)
Total Increase: ($15,000) ($15,000) ($15,000) ($15,000) ($15,000) ($75,000)
Balance carried over from prev year: $30,000 $15,000 $0 ($15,000) ($30,000)
Net Gain/(Loss): $15,000 $0 ($15,000) ($30,000) ($45,000)

As seen in the calculations at the bottom of the table, the $30,000 cost reduction is projected to be eaten up in the first two years by increased operating expenses that are a direct result of the cost reduction changes themselves. The calculations also project that by the 5th year the owner would suffer a net loss of $45,000.

1 Construction Cost Savings Resulting from Design Changes (cost reduction): $30,000
2 Increased Operating Expenses (over 5 years) Resulting From Design Changes: ($75,000)
Net Gain/(Loss) after 5 Years: ($45,000)
Another way to show the impact is to simply subtract the total estimated increased facility operating expenses from the estimated construction cost savings as shown in the table to the right.

Based solely on our cost reduction analysis an owner should be very motivated to make the changes. However, based on the value engineering analysis he should be even more motivated NOT to make them.

Is That All There Is To Value Engineering?

No! While there isn't much more to cost reduction analysis than what we just saw, many more conditions can be considered in value engineering analysis. Here's just a few that could be included in our value engineering analysis example above.

  1. Impacts anticipated from utility cost increases or decreases.
  2. Impacts on electrical system due to undersized/overworked AC unit.
  3. Impacts on furnishings by not having window blinds (fading, material deterioration, etc).
  4. Impacts on furnishings by not having Low-E glass (fading, material deterioration, etc).
  5. Impacts on electronic equipment resulting from AC issues.
  6. Impacts on facilities management having to contend with related issues.
  7. Impacts on facility operations due to AC down time.
  8. Impacts on productivity due to AC down time.
  9. Impacts on tenant satisfaction/turnover due to all of the above.
Why the words "value engineering"? Well, I'm hoping that by what you've read so far, you might have noticed that value engineering analysis can be approached from two different directions. In our example above we started with an energy efficient design and engineered out some of it in order to reduce construction costs. That's one direction. The other direction is to start with a less energy efficient design and engineer more into it in order to achieve lower operating expenses. Let's try it!

Simply assume the original design did not have the items that we eliminated or reduced in our cost reduction example above and the owner asked us to engineer them into the design so that his post-construction facility operational expenses will be reduced. The wise owner knows that over the long term the reduced expenses will offset the increased construction costs and in most cases result in a net a gain. He could even go so far as to ask us to engineer his facility to do that by a given point, say by the 2nd year. That way he will get the most for his money, giving him the most "value". In other words he will have had us engineer value into his facility instead of out of it as before.

Bottom line, you can engineer post-construction value into a facilities design or out of it. Thus the term value engineering. Or, you can disregard post-construction operating expenses and change the design strictly to reduce the cost of construction. Thus the term cost reduction.

The Role That Each Plays

Whether you use value engineering analysis or just cost reduction analysis, each can play an important role in a project. Some project components don't necessarily impact a facility's operational expenses. In those cases cost reduction analysis is the only way to go. They include things like some wall layouts and use of floor area, going with less attractive material designs for things like ceiling tiles and wallpaper, or using a plastic laminate door finish instead of hardwood, just to name a few. However, in other cases (such as our example) it makes most sense to do some value engineering. It's quite possible that it would be beneficial to exercise both cost reduction and value engineering on a project.

Why is it so important to use both terms? The reason is to communicate properly and avoid missunderstandings. They are two different types of analysis that require different amounts of time and expertise to accomplish, resulting in different costs to do them. By using them appropriately you properly communicate that and avoid miscommunication and confusion. It's also a great way to maintain your credibility as a building professional. Additionally, while cost reduction can often be part of a project management team's normal exercise at no extra cost to the owner, value engineering analysis can actually cost a few extra bucks, but many in the building industry don't know that until they find out the hard way.

I remember a project where the owner didn't know the difference and absolutely loved to run around like a chicken saying "VE", which is the acronym for value engineering. He would say "we need to VE this" and "we need to VE that" all the time thinking it had the same meaning as cost reduction. I first discovered this when, as his construction manager, I got a $3,000 proposal from a consultant for value engineering. When I asked the consultant why he did the analysis, he said the owner told him to "VE" it. Well, needless to say, that owner doesn't say "VE" much anymore.

To set you at ease I want to say just a couple things about your history using these terms. First, if in reading this article you discovered that you've been miss using them, don't feel bad or embarrassed. Many of the universities are not teaching them as they should so a lot of people are learning the same way you are. Instead be proud of yourself for taking the initiative to read the article, understand the differences, and learn the proper usage. Good job!

Secondly, use your new knowledge to help owners and others to understand the differences. Who knows, you might save someone the embarrassment of running around like a chicken saying "VE".

Wrapping It Up

OK, let's do a quick summary:
  1. The fundamental difference is that value engineering analysis includes post-construction facility operating expenses and cost reduction does not.
  2. Cost reduction analysis only takes into account design changes that reduce the cost of construction.
  3. Value engineering analysis includes items that are engineered into or out of the design in order to impact post-construction facility operating expenses.
  4. Either analysis or both can benefit a project when applied appropriately.
  5. It's not a good idea to run around like a chicken saying "VE". Instead use the correct term as applicable.
» For more see:
  1. Whole Building Design Guide (WBDG): Value engineering by Scott Cullen
  2. U.S. General Services Administration (GSA): Value engineering
  3. U.S. Army Corps of Engineers: Value engineering
  4. Wikipedia: Value engineering
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