16.2 Value Engineering, Function Analysis System Technique (FAST) & Life Cycle Costing

16.2 Value Engineering, Function Analysis System Technique (FAST) & Life Cycle Costing

In capital project development, achieving maximum economic efficiency without compromising structural integrity, operational safety, or aesthetic intent requires systematic functional analysis. Value Methodology (VM)—encompassing Value Engineering (VE) during design and Value Analysis (VA) during operations—was pioneered by Lawrence D. Miles at General Electric in 1947 and standardized globally by SAVE International.

Within the AACE International Total Cost Management (TCM) Framework, Value Engineering is not a cost-slashing exercise; it is an organized, multidisciplinary creative process that analyzes the functions of a facility, system, or component to achieve essential functions at the lowest life-cycle cost consistent with required performance, reliability, quality, and safety.

For Certified Cost Professional (CCP) candidates, mastering the Value Equation, the 6-Phase Value Job Plan, Function Analysis System Technique (FAST) logic, Function-Cost-Worth calculations, and Life Cycle Costing (LCC / EUAC) models is essential for optimizing capital project investments.

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1. The Value Equation & Core Principles

Value is defined mathematically as the relationship between the function (or performance/quality) delivered by an asset and the resources (life-cycle cost) required to obtain it:

$\mathbf{\text{Value} = \frac{\text{Function (Performance + Quality)}}{\text{Cost (Life-Cycle Cost)}} = \frac{F}{C}}$

+---------------------------------------------------------------------------------------------------+
|                             THE FOUR MODES OF INCREASING VALUE                                    |
|                                                                                                   |
|   MODE 1: INCREASE FUNCTION, MAINTAIN COST          MODE 2: MAINTAIN FUNCTION, REDUCE COST        |
|   - Function increases while Life-Cycle Cost       - Function remains constant while Life-Cycle   |
|     remains fixed (Value ↑ = F↑ / C-).               Cost decreases (Value ↑ = F- / C↓).          |
|   - Typical in technology upgrades.                 - Classic VE optimization target.             |
|                                                                                                   |
|   MODE 3: INCREASE FUNCTION, REDUCE COST            MODE 4: FUNCTION ↑↑ > COST ↑                  |
|   - Function increases while Life-Cycle Cost       - Large functional enhancement gained with     |
|     simultaneously decreases (Value ↑↑ = F↑ / C↓).   a minor, disproportionate cost increase.     |
|   - Breakthrough innovation / system redesign.      - High-yield strategic investment.            |
+---------------------------------------------------------------------------------------------------+

Value Engineering vs. Arbitrary Cost Cutting

A critical distinction tested on the CCP exam is the difference between true Value Engineering and arbitrary cost cutting:

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2. The 6-Phase SAVE International Value Job Plan

The Value Job Plan is the structured, sequential framework mandated for conducting formal Value Engineering studies:

+---------------------------------------------------------------------------------------------------+
|                             THE 6-PHASE SAVE INTERNATIONAL VALUE JOB PLAN                         |
|                                                                                                   |
|   [ 1. INFORMATION PHASE ]    --> Gather project baseline data, drawings, costs, and constraints  |
|              |                                                                                    |
|   [ 2. FUNCTION ANALYSIS ]    --> Identify, classify, and model functions (FAST); Cost vs. Worth   |
|              |                                                                                    |
|   [ 3. CREATIVE PHASE ]       --> Divergent brainstorming; generate ideas without judgment        |
|              |                                                                                    |
|   [ 4. EVALUATION PHASE ]     --> Convergent ranking; Pugh matrix scoring and feasibility screen  |
|              |                                                                                    |
|   [ 5. DEVELOPMENT PHASE ]    --> Engineering modeling, Life-Cycle Costing (LCC), formal proposals|
|              |                                                                                    |
|   [ 6. PRESENTATION PHASE ]   --> Executive report to stakeholders, implementation tracking        |
+---------------------------------------------------------------------------------------------------+

Detailed Breakdown of the 6 Phases

1. Information Phase: The multidisciplinary VE team reviews project scope baselines, design criteria, engineering drawings, specifications, work breakdown structures (WBS), cost models, and operational constraints. Key stakeholders and end users are interviewed.
2. Function Analysis Phase (The Heart of VE): The team identifies what the project or system actually does, establishes functional definitions using two-word pairs, determines basic vs. secondary functions, constructs a FAST diagram, and maps costs to functions to identify areas of low value.
3. Creative (Brainstorming) Phase: The team employs divergent thinking techniques (Osborn brainstorming, lateral thinking, morphological analysis) to generate a high volume of unconstrained alternative methods to perform the basic functions. No criticism or evaluation is permitted in this phase.
4. Evaluation Phase: The team shifts to convergent thinking, screening, filtering, and scoring generated ideas using weighted criteria (Pugh decision matrix, feasibility analysis, risk rating, initial cost, constructability).
5. Development Phase: The highest-ranked alternatives are developed into formal, rigorous engineering proposals. This includes detailed sketches, structural/mechanical calculations, implementation schedules, risk assessments, and Life-Cycle Cost (LCC) comparative models.
6. Presentation Phase: The VE team presents formal recommendations to executive decision-makers, owner leadership, and the design team through an oral presentation and a comprehensive written Value Engineering Proposal Report.

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3. Function Analysis & FAST Diagramming Mechanics

Function Definition Rules

In Value Engineering, every function must be defined using exactly two words:

• Active Transitive Verb: What it does (e.g., Generate, Support, Transmit, Contain, Filter, Dissipate, Protect).
• Measurable Noun: What it does it to (e.g., Power, Load, Torque, Pressure, Particulates, Heat, Voltage).

Function Classification Taxonomy

• Basic Function: The specific, primary, indispensable purpose for which the asset or system was created. If a basic function is not performed, the product or facility completely fails to satisfy user needs. An item typically has only one or two basic functions.
  • Example (Highway Bridge): "Support Load" or "Span Gap".
  • Example (Process Pipeline): "Convey Fluid".
• Secondary Function: Functions that support the basic function, result from specific design choices, satisfy aesthetic desires, or represent unwanted side effects.
  • Required Secondary: Mandated by codes or physical reality (e.g., "Resist Corrosion", "Vent Gas").
  • Aesthetic / Sell Function: Pleases the user (e.g., "Enhance Appearance").
  • Unwanted Secondary: Side effects to minimize (e.g., "Generate Noise", "Produce Heat").

Function-Cost-Worth & The Value Index

• Function Cost ($C$): The actual estimated dollar cost allocated to perform a specific function under the current design baseline.
• Function Worth ($W$): The lowest theoretical cost required to perform the basic function using the simplest available alternative design.
• Value Index ($VI$): $\mathbf{\text{Value Index} = \frac{\text{Function Cost}}{\text{Function Worth}} = \frac{C}{W}}$
  • If $VI \le 1.0$: Good value; cost matches or approaches minimum worth.
  • If $VI > 1.0$: Poor value; high potential for Value Engineering optimization (cost significantly exceeds fundamental worth).

FAST Diagramming Logic Architecture

Function Analysis System Technique (FAST) organizes functions into a logical network that displays their structural and functional relationships:

+---------------------------------------------------------------------------------------------------+
|                             FAST DIAGRAM LOGIC ARCHITECTURE                                       |
|                                                                                                   |
|   <================== WHY? ================== | ================== HOW? ==================>       |
|                                                                                                   |
|   LEFT SCOPE LINE                                                          RIGHT SCOPE LINE       |
|   (Higher-Order)                                                           (Basic Input)          |
|         |                                                                         |               |
|   +-------------+      +----------------+      +----------------+          +---------------+      |
|   | HIGHER-ORDER| <--- | BASIC FUNCTION | ---> | BASIC FUNCTION | <------- |  INPUT CAUSE  |      |
|   |  FUNCTION   |      |  (Primary 1)   |      |  (Primary 2)   |          |  (Assumed)    |      |
|   +-------------+      +----------------+      +----------------+          +---------------+      |
|                                |                       |                                          |
|                                | WHEN? / SUPPORTING    | WHEN? / CONCURRENT                       |
|                                v                       v                                          |
|                        +---------------+       +---------------+                                  |
|                        |   SECONDARY   |       |   SECONDARY   |                                  |
|                        |   FUNCTION    |       |   FUNCTION    |                                  |
|                        +---------------+       +---------------+                                  |
+---------------------------------------------------------------------------------------------------+

• Horizontal Logic (Critical Function Path):
  • Moving Left to Right, ask: "HOW is this function performed?" (The function to the right answers how).
  • Moving Right to Left, ask: "WHY is this function performed?" (The function to the left answers why).
• Vertical Logic (Concurrent & Supporting Functions):
  • Placed above or below the critical path to answer: "WHEN does this function occur?" or "WHAT supporting function is required?"
• Scope Lines:
  • Left Scope Line: Bounds the project scope; functions to the left are higher-order goals beyond the project team's control.
  • Right Scope Line: Bounds the input/assumed conditions entering the system.

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4. Life Cycle Costing (LCC) & Total Cost of Ownership (TCO)

Life Cycle Costing (LCC) is the economic analysis methodology used in Value Engineering to evaluate the total cradle-to-grave cost of an asset over its designated study period:

$\mathbf{LCC = C_{\text{CapEx}} + \sum_{t=1}^N \frac{C_{\text{Energy},t} + C_{\text{O\&M},t} + C_{\text{Repair},t}}{(1+i)^t} + \sum_{r} \frac{C_{\text{Renewal},r}}{(1+i)^{t_r}} - \frac{\text{Salvage}}{(1+i)^N} + \frac{C_{\text{Decommissioning}}}{(1+i)^N}}$

+---------------------------------------------------------------------------------------------------+
|                         CRADLE-TO-GRAVE LIFE CYCLE COST (LCC) PHASES                              |
|                                                                                                   |
|   1. ACQUISITION (CapEx)   2. OPERATIONS & ENERGY    3. MAINTENANCE & REPAIRS 4. DISPOSAL/SALVAGE |
|   - Engineering & Design   - Fuel / Electricity      - Preventive Maintenance - Demolition        |
|   - Equipment Procurement  - Water / Consumables     - Routine Overhauls      - Remediation       |
|   - Construction & Inst.   - Operating Staff Labor   - Emergency Repairs      - Less: Salvage Val.|
+---------------------------------------------------------------------------------------------------+

Equivalent Uniform Annual Cost (EUAC)

When comparing competing VE design alternatives with unequal operational lifespans, cost engineers must convert the Net Present Value (NPV) of lifecycle costs into the Equivalent Uniform Annual Cost (EUAC) using the Capital Recovery Factor $(A/P, i, N)$:

$\mathbf{\text{EUAC} = \text{NPV}_{\text{LCC}} \times \left[ \frac{i(1+i)^N}{(1+i)^N - 1} \right] = \text{NPV}_{\text{LCC}} \times (A/P, i, N)}$

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5. Comprehensive Worked Mathematical Case Studies

Case Study 1: Function-Cost-Worth & Value Index Analysis

Scenario: A VE team evaluates the building envelope system for an industrial laboratory facility. The current design baseline cost is $3,200,000. The team performs functional costing:

• Analysis & Findings:
  • Functions 1, 2, and 3 have Value Indices near 1.0, representing efficient engineering value.
  • Function 4 ("Enhance Prestige", $VI = 5.33$) and Function 5 ("Deflect Sunlight", $VI = 5.00$) exhibit extreme cost-to-worth disproportion.
  • The VE team focuses the creative phase on aesthetic skin simplification and replacing custom motorized exterior louvers with high-performance low-E electrochromic glass, saving $720,000 in CapEx while fully preserving thermal insulation and aesthetic ratings.

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Case Study 2: Life Cycle Cost (LCC) & EUAC Comparison of Pumping Systems

Scenario: An industrial wastewater plant must select between two industrial slurry pump systems for a 20-year operational lifecycle at a Discount Rate ($i$) of 8%:

• System A (Standard Cast Iron):
  • Initial Capital Cost ($C_{\text{CapEx}}$) = $120,000
  • Annual Operating Energy & Routine Maintenance = $35,000 / year
  • Major Overhaul at End of Year 10 = $40,000
  • Useful Life = 20 years; Salvage Value at Year 20 = $0
• System B (High-Efficiency Duplex Stainless Steel):
  • Initial Capital Cost ($C_{\text{CapEx}}$) = $190,000
  • Annual Operating Energy & Routine Maintenance = $22,000 / year (due to premium variable frequency drive and wear-resistant impellers)
  • Major Overhaul at End of Year 10 = $15,000
  • Useful Life = 20 years; Salvage Value at Year 20 = $20,000

Step 1: Calculate Present Value Factors at $i = 8%, N = 20$

• Uniform Series Present Worth Factor $(P/A, 8%, 20) = \frac{(1+0.08)^{20} - 1}{0.08(1+0.08)^{20}} = \mathbf{9.8181}$
• Single Payment Present Worth Factor for Year 10 $(P/F, 8%, 10) = \frac{1}{(1.08)^{10}} = \mathbf{0.4632}$
• Single Payment Present Worth Factor for Year 20 $(P/F, 8%, 20) = \frac{1}{(1.08)^{20}} = \mathbf{0.2145}$
• Capital Recovery Factor $(A/P, 8%, 20) = \frac{1}{9.8181} = \mathbf{0.10185}$

Step 2: Compute Net Present Value of Life Cycle Cost for System A

$\text{NPV}_{\text{LCC, A}} = \text{CapEx} + [\text{Annual O\&M} \times (P/A)] + [\text{Overhaul}_{10} \times (P/F_{10})]$ $\text{NPV}_{\text{LCC, A}} = \$120,000 + (\$35,000 \times 9.8181) + (\$40,000 \times 0.4632)$ $\text{NPV}_{\text{LCC, A}} = \$120,000 + \$343,634 + \$18,528 = \mathbf{\$482,162}$ $\text{EUAC}_A = \$482,162 \times 0.10185 = \mathbf{\$49,108\text{ / year}}$

Step 3: Compute Net Present Value of Life Cycle Cost for System B

$\text{NPV}_{\text{LCC, B}} = \text{CapEx} + [\text{Annual O\&M} \times (P/A)] + [\text{Overhaul}_{10} \times (P/F_{10})] - [\text{Salvage}_{20} \times (P/F_{20})]$ $\text{NPV}_{\text{LCC, B}} = \$190,000 + (\$22,000 \times 9.8181) + (\$15,000 \times 0.4632) - (\$20,000 \times 0.2145)$ $\text{NPV}_{\text{LCC, B}} = \$190,000 + \$215,998 + \$6,948 - \$4,290 = \mathbf{\$408,656}$ $\text{EUAC}_B = \$408,656 \times 0.10185 = \mathbf{\$41,622\text{ / year}}$

Step 4: Comparative VE Recommendation

• Life Cycle Cost Net Present Value Savings = $$482,162 - $408,656 = \mathbf{$73,506\text{ Net Savings (15.25%)}}$
• Decision: Although System B costs $70,000 more upfront ($190k vs $120k), it delivers $73,506 in life-cycle savings (PV) and reduces annualized operational costs by $7,486/year. System B is the superior Value Engineering selection.

[!TIP] AACE CCP Exam Alert — FAST Diagramming & VE Rules:

• Moving Right on the FAST critical path answers "HOW".
• Moving Left on the FAST critical path answers "WHY".
• Basic functions cannot be eliminated without compromising the product's fundamental mission.
• Value Index = Cost / Worth. A higher ratio signifies greater potential for cost reduction.