14.3 Value Engineering & Value Methodology

14.3 Value Engineering & Value Methodology

Quick Summary: Value Engineering (VE) is a systematic, organized approach to providing the necessary functions in a project at the lowest life-cycle cost without sacrificing essential quality, reliability, performance, or safety. Conceived by Lawrence D. Miles at General Electric during World War II and codified by SAVE International and AACE International, VE centers on the fundamental equation: $\text{Value} = \frac{\text{Function}}{\text{Cost}}$. By decomposing designs into active two-word function definitions (Verb + Measurable Noun), mapping them via FAST diagrams, and executing the Six-Phase Job Plan, cost engineers eliminate unnecessary capital and operational expenditures while preserving design integrity.

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1. Origins, Governance & Core Philosophy of Value Engineering

During World War II (1947), the General Electric Company faced severe shortages of critical raw manufacturing materials, including copper, nickel, and alloy steels. Lawrence D. Miles, a GE purchasing engineer, was tasked with sourcing alternative replacement materials. Miles made a profound discovery: in many instances, the substitute materials not only performed the required task equal to or better than the original specified material, but they frequently did so at a substantially reduced production cost.

Miles deduced that product designers routinely specify materials out of habit or tradition rather than functional necessity. He formalized a structured discipline called Value Analysis (VA) for existing products, which subsequently expanded into Value Engineering (VE) when applied during project design phases prior to capital expenditure.

+-----------------------------------------------------------------------------------+
|                      VALUE METHODOLOGY PROFESSIONAL GOVERNANCE                    |
+---------------------+-------------------------------------------------------------+
| SAVE International  | Society of American Value Engineers (founded 1959).         |
|                     | Sets global standards for the Value Methodology (VM),       |
|                     | administers Certified Value Specialist (CVS) credentials,   |
|                     | and codifies the standardized Six-Phase Job Plan.           |
+---------------------+-------------------------------------------------------------+
| AACE International  | Recommended Practice 11R-88 (Required Skills and Knowledge  |
|                     | in Cost Engineering) and RP 78R-13 (Value Engineering).     |
|                     | Integrates VE into the Total Cost Management (TCM)          |
|                     | framework during front-end design and procurement.          |
+---------------------+-------------------------------------------------------------+

The Fundamental Philosophy: VE is NOT Indiscriminate Cost Cutting

A common misconception in project management is equating Value Engineering with "cost cutting" or "budget slashing." The CCT candidate must clearly distinguish between the two:

• Cost Cutting (Scope Reduction): Indiscriminately removes scope, reduces material thickness, lowers aesthetic finishes, or cancels project features simply to force an over-budget project back under a cost ceiling. Performance, durability, safety margins, or lifecycle operating efficiencies are compromised.
• Value Engineering: Preserves or enhances required performance, reliability, quality, and safety while systematically identifying and eliminating unnecessary life-cycle cost. If a proposed change diminishes the required functional capability or safety of the facility, it is not Value Engineering.

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2. The Fundamental Value Equation & Strategic Pathways

At the heart of all value engineering lies the classic mathematical expression of value:

$\text{Value} = \frac{\text{Function (or Worth)}}{\text{Cost}} = \frac{\text{Performance}}{\text{Cost}}$

Where:

• Function: The specific purpose, utility, or performance characteristic that an item, system, or facility must deliver.
• Worth: The lowest possible cost required to reliably perform the basic function using the simplest available method.
• Cost: The total life-cycle cost (initial capital acquisition plus long-term operations, maintenance, and disposal).

+-----------------------------------------------------------------------------------+
|                       FOUR STRATEGIC MECHANISMS TO ELEVATE VALUE                  |
+------------------------------------+----------------------------------------------+
| STRATEGY                           | MATHEMATICAL EFFECT ON VALUE                 |
+------------------------------------+----------------------------------------------+
| 1. Maintain Function, Reduce Cost  | Function [ = ] / Cost [ \downarrow ]  --> Value [ \uparrow ] |
|    (The Classic VE Sweet Spot)     | Performs the exact same task using cheaper,  |
|                                    | more efficient materials or modular methods. |
+------------------------------------+----------------------------------------------+
| 2. Increase Function, Maintain Cost| Function [ \uparrow ] / Cost [ = ]  --> Value [ \uparrow ] |
|    (Enhanced Operational Value)    | Delivers higher capacity, reliability, or    |
|                                    | speed at the exact same baseline budget.     |
+------------------------------------+----------------------------------------------+
| 3. Increase Function, Reduce Cost  | Function [ \uparrow ] / Cost [ \downarrow ]  --> Value [ \Uparrow ]|
|    (Breakthrough Innovation)       | Breakthrough engineering that improves       |
|                                    | utility while slashing capital expenditure.  |
+------------------------------------+----------------------------------------------+
| 4. Slight Functional Decrease,     | Function [ \downarrow ] / Cost [ \Downarrow ] --> Value [ \uparrow ]|
|    Massive Cost Reduction          | Permissible ONLY if the reduced performance  |
|    (Eliminate Redundant Feature)   | exceeds baseline client needs and the owner  |
|                                    | approves eliminating unneeded luxury.        |
+------------------------------------+----------------------------------------------+

The Life-Cycle Cost (LCC) Dimension

Value engineering evaluations must never focus solely on initial capital expenditure (CapEx). A proposed structural material that saves $100,000 in initial procurement but increases annual maintenance and corrosion repair expenditures by $25,000 across a 30-year operational life has an astronomical negative Net Present Value (NPV). True VE evaluates Total Cost of Ownership (TCO), factoring in: $\text{Life-Cycle Cost (LCC)} = \text{Initial CapEx} + \text{Operating Costs} + \text{Maintenance Costs} - \text{Salvage Value}$

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3. Function Analysis: The Two-Word Syntax (Verb + Noun)

The cornerstone of Value Methodology is Function Analysis. Lawrence Miles recognized that if an engineering team discusses physical objects (e.g., "a concrete retaining wall" or "a 12-inch steel pipe"), their minds immediately fixate on incremental improvements to that specific physical object. Function analysis strips away the physical object and forces the team to articulate what the object actually does.

The Two-Word Syntax Mandate

In accordance with SAVE International standards, every function must be defined using exactly two words: $\text{Function} = \text{Active Verb} + \text{Measurable Noun}$

• Active Verb: Answers what the item does. Must be an actionable verb (e.g., support, contain, retard, conduct, emit, dissipate, protect).
• Measurable Noun: Answers what the verb acts upon. The noun must be measurable in physical units (e.g., load, fluid, heat, current, light, energy, structure).

EXAMPLES OF PROPER FUNCTION DEFINITIONS:
[BAD]  "Pump wastewater to the treatment plant"   --> Too verbose, describes physical system
[GOOD] "Move fluid" or "Displace liquid"        --> Precise active verb + measurable noun

[BAD]  "Build a 4-foot chain link security fence" --> Describes a physical design choice
[GOOD] "Deter intrusion" or "Prevent access"     --> Focuses on the pure functional requirement

[BAD]  "Apply heavy fiberglass pipe insulation"   --> Describes a product
[GOOD] "Retard heat"                             --> Identifies the exact thermal function

Classification of Functions

1. Basic Function: The primary, indispensable reason for the existence of the product, system, or project. If the basic function is eliminated or fails, the item is completely useless. A component typically has only one or two basic functions.
   • Example (Warehouse Roof): "Shed water" or "Protect interior."
   • Example (Electrical Conductor): "Conduct current."
   • Example (Structural Beam): "Support load."
2. Secondary Function: A function that supports the basic function or arises as an inevitable consequence of a specific design choice, aesthetic requirement, or convenience. Secondary functions can be modified, combined, or eliminated entirely without defeating the basic purpose.
   • Example (Fluorescent Light Fixture): Basic function is "generate light." Secondary functions include "diffuse glare" (aesthetic), "enclose wiring" (safety/code), and "secure ballast" (supporting).
3. Higher-Order Function: The overarching enterprise objective that lies outside the immediate boundary of the system under study (answers why the basic function is performed).

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4. Function Analysis System Technique (FAST) Diagramming

Developed in 1965 by Charles W. Bytheway, the Function Analysis System Technique (FAST) is a graphical diagramming method that displays the interrelated functions of a project in a logical sequence based on rigorous cause-and-effect rules.

+-----------------------------------------------------------------------------------+
|                            FAST DIAGRAM HOW-WHY LOGIC                             |
|                                                                                   |
|       <--- WHY? (Moving Left)                  HOW? (Moving Right) --->           |
|                                                                                   |
|  [HIGHER-ORDER] <=== [BASIC FUNCTION] <=== [SECONDARY 1] <=== [SECONDARY 2]      |
|    FUNCTION              (Core Need)          (Required)         (Method)         |
|                                                                                   |
|  Question: "WHY do we conduct current?"       Question: "HOW do we retard heat?"  |
|  Answer:   "To illuminate space."             Answer:   "By trapping air."        |
+-----------------------------------------------------------------------------------+

The Fundamental Directional Logic of FAST

1. The "HOW?" Direction (Moving Left to Right):
   • When reading a FAST diagram from left to right, each step answers the question: "HOW is this function accomplished?"
   • Progression: How do you "Support Load"? By "Transmitting Force." How do you "Transmit Force"? By "Compressing Column." How do you "Compressing Column"? By "Pouring Footing."
2. The "WHY?" Direction (Moving Right to Left):
   • When reading a FAST diagram from right to left, each step answers the question: "WHY is this function performed?"
   • Progression: Why do you "Pour Footing"? To "Compress Column." Why do you "Compress Column"? To "Transmit Force." Why do you "Transmit Force"? To "Support Load."
3. Scope Lines: Vertical dashed lines define the operational boundaries of the VE study. The left scope line separates the basic function from higher-order functions outside the team's control. The right scope line separates the system functions from external input causes.

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5. The Six Phases of the SAVE International VE Job Plan

A Value Engineering study is not an unstructured brainstorming session. It follows a rigorous, sequential, multi-disciplinary process known as the VE Job Plan.

+-----------------------------------------------------------------------------------+
|                    SAVE INTERNATIONAL SIX-PHASE VE JOB PLAN                       |
+-----------------------------------------------------------------------------------+
|  PHASE 1: INFORMATION PHASE                                                       |
|  Collect project drawings, specifications, cost estimates, site constraints,      |
|  geotechnical data, and owner criteria. Interview key stakeholders.               |
+-----------------------------------------------------------------------------------+
|  PHASE 2: FUNCTION ANALYSIS PHASE                                                 |
|  Define functions using active Verb-Noun pairs. Build FAST diagram.               |
|  Allocate costs to functions. Calculate Value Index (Cost / Worth) to identify    |
|  high-cost, low-worth components.                                                 |
+-----------------------------------------------------------------------------------+
|  PHASE 3: CREATIVE (BRAINSTORMING) PHASE                                          |
|  Multidisciplinary team generates numerous uninhibited ideas to perform basic    |
|  functions. Critical Rule: Defer all judgment; no criticism allowed.              |
+-----------------------------------------------------------------------------------+
|  PHASE 4: EVALUATION PHASE                                                        |
|  Screen and rank brainstormed ideas against feasibility, schedule impact, risk,   |
|  constructability, and owner criteria. Eliminate unworkable concepts.            |
+-----------------------------------------------------------------------------------+
|  PHASE 5: DEVELOPMENT PHASE                                                       |
|  Engineer the top-ranked proposals in detail. Develop sketches, life-cycle cost   |
|  (LCC) models, implementation schedules, and risk mitigation analyses.           |
+-----------------------------------------------------------------------------------+
|  PHASE 6: PRESENTATION PHASE                                                      |
|  Deliver formal oral presentation and comprehensive written VE report to the      |
|  owner, design team, and executive decision-makers.                               |
+-----------------------------------------------------------------------------------+

Note: Following presentation, project management executes the Implementation Phase (formal approval and baseline contract modification) and the Audit Phase (tracking verified savings during construction and operation).

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6. Value Engineering Change Proposals (VECP) in Construction Contracts

Cost technicians must distinguish between design-phase VE workshops and contractor-initiated value engineering during construction.

• Design-Phase VE: Conducted during the 30% to 60% design stage by an independent multidisciplinary team. Approved ideas are incorporated directly into the bidding documents before contract award. The owner captures 100% of the cost savings.
• Value Engineering Change Proposal (VECP): A formal post-award contractual mechanism (standardized under Federal Acquisition Regulation [FAR] Part 48 and commercial AIA/EJCDC contract conditions) that encourages the construction contractor to propose voluntary changes that reduce the cost of performance without degrading functional requirements.

The VECP Incentive Mechanism: 50/50 Sharing

Under standard fixed-price construction contracts, when an owner approves a contractor-submitted VECP:

1. The contractor is reimbursed for the verified engineering and administrative costs incurred in developing the proposal.
2. The owner deducts verified engineering review costs incurred to evaluate and redesign the package.
3. The net contractual savings are shared between the owner and the contractor—most commonly on a 50% / 50% split (or 55/45 depending on contract terms).

$\text{Net VECP Savings} = \text{Gross Cost Reduction} - \text{Contractor Development Costs} - \text{Owner Review Costs}$ $\text{Contractor Share} = \text{Contractor Development Costs} + (0.50 \times \text{Net VECP Savings})$ $\text{Adjusted Contract Price} = \text{Original Contract Price} - \text{Gross Cost Reduction} + \text{Contractor Share}$

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7. Step-by-Step Worked Cost Engineering Calculations

Calculation 1: Function Worth and Value Index Analysis

During the Function Analysis phase of an industrial warehouse project, the VE team analyzes the soil retention system. The baseline design specifies a continuous drilled secant-pile retaining wall costing $1,200,000.

• Function Definition: "Retain Earth."
• Function Classification: Basic Function.
• Function Worth: The lowest historical industry cost to perform the basic function ("retain earth") under these soil conditions using a mechanically stabilized earth (MSE) modular block wall is $750,000.

$\text{Value Index (VI)} = \frac{\text{Cost of Current Design}}{\text{Worth of Basic Function}} = \frac{\$1,200,000}{\$750,000} = 1.60$

Interpretation: In value methodology, a Value Index significantly greater than 1.0 indicates that the design contains substantial unnecessary cost and represents a prime candidate for value engineering redesign.

Calculation 2: Comprehensive VECP Contractual Financial Settlement

A general contractor on a $35,000,000 highway interchange project identifies an alternative precast box-culvert design to replace a cast-in-place concrete bridge deck over a seasonal drainage canal.

• The contract contains a standard FAR Part 48 VECP incentive clause specifying a 50/50 split of net savings.
• Original Contract Item Cost: $2,400,000 (cast-in-place deck).
• Proposed Alternative Item Cost: $1,550,000 (precast modular box culvert).
• Contractor Proposal Development Costs: $45,000 (structural calculations and drafting).
• Owner Engineering Review & Geotechnical Verification Costs: $35,000.

Step A: Calculate Gross Contract Cost Savings

$\text{Gross Savings} = \text{Original Cost} - \text{Alternative Cost} = \$2,400,000 - \$1,550,000 = \$850,000$

Step B: Calculate Net VECP Savings

$\text{Net Savings} = \text{Gross Savings} - \text{Contractor Development Costs} - \text{Owner Review Costs}$ $\text{Net Savings} = \$850,000 - \$45,000 - \$35,000 = \$770,000$

Step C: Calculate Contractor Incentive Share

Under the 50/50 contractual sharing clause, the contractor receives their $45,000 development cost reimbursement plus 50% of net savings: $\text{Contractor Incentive Share} = \$45,000 + (0.50 \times \$770,000) = \$45,000 + \$385,000 = \$430,000$

Step D: Calculate Owner Net Financial Savings

$\text{Owner Net Savings} = \text{Gross Savings} - \text{Contractor Incentive Share} - \text{Owner Review Costs}$ $\text{Owner Net Savings} = \$850,000 - \$430,000 - \$35,000 = \$385,000$ (Notice that the net $770,000 savings is divided exactly 50/50: $385,000 to the contractor and $385,000 to the owner!)

Step E: Determine the Final Adjusted Contract Value

$\text{Adjusted Contract Price} = \text{Original Baseline} - \text{Gross Savings} + \text{Contractor Share}$ $\text{Adjusted Contract Price} = \$35,000,000 - \$850,000 + \$430,000 = \$34,580,000$ (Verification: $$35,000,000 - $34,580,000 = $420,000$ net contract price reduction, which equals the owner's $385,000 net savings plus $35,000 reimbursement of internal engineering review costs!)

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8. Exam Watch: High-Yield Traps & Technical Rules

[!WARNING] The "Cost Cutting vs. VE" Trap: If an exam question describes a scenario where an owner eliminates exterior brick veneer and leaves bare painted concrete block to meet an immediate budget shortfall, this is Cost Cutting / Scope Deletion, not Value Engineering. Value Engineering never eliminates basic functional performance; it fulfills required functions through more efficient, alternative technical solutions.

[!CAUTION] FAST Diagramming Directional Rule: A frequently tested concept on the CCT exam is the directional logic of the FAST diagram. Remember: Moving LEFT-TO-RIGHT answers HOW the function is achieved. Moving RIGHT-TO-LEFT answers WHY the function is performed. If you reverse these directions on the exam, you will select the wrong answer.

[!TIP] Net vs. Gross VECP Calculations: In VECP word problems, never split the gross savings! Always deduct both the contractor's allowable proposal preparation expenses and the owner's verification review costs from the gross savings to determine the net savings before multiplying by the 50% sharing fraction.