Added Value in Design and Construction

Allan Ashworth, Keith Hogg

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317878773
• Edition: 1
• Topic: Business
• Subtopic: Insurance
• Index: Business

Added Value in Design and Construction takes a holistic, student-centred approach to offering public and private sector clients the ultimate reward; doing more for less. The Latham Report was a call to action and this book provides students of construction with the theoretical and practical knowledge to deliver the recommendations of the report. It describes the principles and techniques crucial to adding value and reducing costs in design and construction in the twenty first century. This book examines in detail a wide range of strategies that can be applied during the design and construction process to add value and bring the best interests of the client sharply into focus.

Chapter 1 The nature of added value

1.1 Introduction

The original and main use of buildings was lor the purpose of shelter. However, today this use has been extended to many other purposes associated with production and investment, work and leisure. Buildings are no longer constructed is in the distant or recent past, nor are they financed and paid for in the same way. As design and construction have become more complex, the economics associated with these activities have also become more comprehensive. It is no longer sufficient to think of buildings in terms of their capital building costs alone, but to measure costs through a whole cost or holistic approach. This does not just envisage the buildings themselves but the land and plant costs and the way in which the buildings or projects are to be used. Today the application of creative building economics is as important as creative design and creative construction. The costs can therefore no longer be left to chance, wishful thinking or an act of God. Many building owners (Egan, 1998) have an enthusiastic desire to reduce the overall costs or to increase the long-term benefits achieved or, more preferably, to secure a combination of both of these objectives.

1.2 Value

Value is of all things a very subjective judgement. It is somewhat like beauty, where its assessment is largely in the eye of the beholder. The beholder, as far as building and construction projects are concerned, is the client who commissioned the project. Value constitutes a measure between supply and demand. An increase in the value of an object is achieved either through an increase in its demand or a decrease in its supply. Value also represents the usefulness and scarcity of an object relative to other objects or commodities. Value, therefore, gives an indication of both scarcity and usefulness when compared with other items. Value is regarded as a complex entity made up of scarcity, utility, costs of production, worth in use, value in exchange and marginal utility. It is influenced by the conditions of supply and demand.

Raftery (1991) points out that, in theory, it is expected that more will always be paid for a useful commodity than for one that is less useful. However, this might not always be the case and there are many examples that can be used to illustrate this point. The paradox of value illustrated by comparing water and diamonds suggests that the former has a low value but high utility whereas the diamond has a high value but low utility.

The economic theory of marginal utility, where the value of an additional unit is often related to the proportion of units already owned, suggests that value is only a relative term. Value is not intrinsic within an item but it is the relationship placed by someone on a particular item. Different individuals will therefore choose to value different items in different ways. Burt (1975) defines maximum value as a level of quality from a least cost, the highest level of quality for a given cost or from an optimum compromise between the two.

Kelly and Male (1993) suggest that value can be measured in currency, effort, exchange or on a comparative scale, that reflects the desire to obtain or retain an item, service or ideal. Authors often prefix value with different terms such as use, exchange, esteem, aesthetic, judicial, moral, etc., in order to highlight different value situations that reflect different value judgements. Use value, for example, is a measure of the function of the item. A chisel, for example, has a high value as a tool for cutting wood but a low value if it is used as a screwdriver, although it could be used for both tasks. Exchange value is the amount for which an item may be sold. Esteem value is the amount an owner or user is prepared to pay for prestige or appearance.

Value from a client's perspective is the relationship between quality and price (Morton, 1987). Quality can be defined as the degree of excellence of a product, trait, characteristic or attitude. These definitions can be consolidated and the term presented as the relationship between cost and the reliability or performance of a product. The value must be capable of measurement so that incremental levels of value can then be expressed. Lord Kelvin (1824-1907) said:

'When you can measure what you are speaking of and express it in numbers you know on what you are discoursing. But when you cannot measure it and express it in numbers, your knowledge is of a very meagre and unsatisfactory kind."

1.3 Value for money

Value is a comparative term expressing the worth of an item or commodity, usually in the context of other similar or comparable items. Cheapness in itself is of no virtue. It is worth while to pay a little more if the gain in value exceeds the extra costs involved. For example, it has sometimes been shown that to spend an extra sum initially on construction costs can have the effect of reducing recurring or future costs and hence the overall sum (or life cycle cost) spent on an investment. This, of course, may not always be the case since high initial costs may require high recurring costs for their upkeep or maintenance.

Value for money is an easy concept to understand but difficult to explain. It is in part subjective in its assessment in that different individuals assess different things in different ways. The appearance of buildings or engineering structures will always be largely subjective, even though a framework of rules may be devised for its evaluation. However, the opinions or judgements of others cannot be entirely disregarded. Designers have developed some rules or guidelines for the assessment or judgement of aesthetics based upon shape, form, colour, proportion, etc. The assessment of aesthetic design is difficult, since personal choice and taste are factors that need to be considered.

The engineering aspects of design, such as function or performance, are in part able to be judged against a more objective criteria. This, on the face of it, appears to be easier to assess and to make comparisons in terms of value for money. The criteria are frequently provided to designers in a client's brief and can realistically be compared with other similar structures. For example, the judgement of the spatial layout represents the adequacy of the internal space arrangement and can be related to the extent to which it facilitates the desired functions to be performed in the building. The structural components and the environmental comforts that are created can be judged in a similar manner, often using simple numerical data and analysis.

The third factor to consider is that of cost and value. The obvious approach is to put all the measurable components on one side of the equation in the form of cost, and to set these against the subjective and objective value judgements in an attempt to determine value for money. The determination of the best solution will never be an exact science, since it will always rely upon judgements set against a client's own value judgements that may be expressed as aims and objectives or outcomes. A part of value for money is quantitative in its analysis, and other aspects will always remain qualitative by definition. Value for money is the start of the process of added value. It is the principle of doing more with less - a feature that has become common in all walks of life.

As we enter the next century, a major theme remains value tor money, now more appropriately described and defined as added value. Recent reports (Egan, 1998) have indicated that clients in the future will require increased value for the money that is expended on their capital projects. The principle involves reducing the relative costs of construction by designing, procuring and constructing the work in a different way than at the present time. The construction industry has, of course, been responding to this challenge with some success throughout the latter part of the twentieth century. It involves doing more for less by removing unnecessary costs. It has the aims to meet the perceived needs associated with efficiency, effectiveness and economy.

1.4 Added Value

Added value is not new. It has been around for over 200 years, although until recently little seems to have been written about it. A United States of America Treasury official, Mr Tenche Cox, supposedly devised the idea. The technique is useful in measuring company performance and in monitoring manpower productivity or work outputs. It is claimed by some authors to be the real key to prosperity. It is usually referred to as added value rather than value added, since the latter description gives the impression of an afterthought, but the two terms are often thought as synonymous with each other.

Added value is a term that is used to describe the contribution a process makes to the development of its products. At a primitive level mankind goes into the forest and cuts down a tree and converts this to furniture. In so doing, value is added to the raw materials that are used. In a more complex industrial society, a manufacturing business purchases materials, components, fuel and various other services. It converts these various resources into products that can be sold for more than their combined cost. In so doing it adds value, although the amount of added value may not be significant enough to make the process worth while. Different individuals and firms will assess the significance in different ways. The construction industry uses plant, materials, people and other resources. The completed projects are usually greater than the sum of their various parts. This represents added value. Powell (1998), for example, has suggested that clients may be prepared to invest £10,000 in professional fees for £100,000 of demonstrable client benefit or added value. There is an increasing demand on the part of some clients to assess the payment of professional fees in this way. It is believed by many that where benefits, or added value, cannot be demonstrated then the associated professional services may disappear.

An alternative method of increasing added value, without changing prices or products, is to reduce the costs of the production involved. The techniques of value engineering, analysis and management have been shown to be effective in this way. The organised approach towards cost reduction goes beyond conventional methods by questioning the function of the product, component or process.

In the context of business, activities are considered to be repetitive actions that are performed to fulfil a business function. These activities can be judged to be either value added or non-value added. An activity may increase the worth of a product or service to the client, and where a client is willing to purchase such an activity it is considered to be added value. Some activities simply add time or cost to a service but do not increase its worth significantly enough to the client. In these situations they are described as non-added value. The additional time or costs here are considered to be unnecessary and should therefore be eliminated.

It should be noted that the measure of added value is not the effort that has gone into this activity. Added value is defined by the satisfaction of the customer or client and not by the producer. The manufacture of quill pens, for example, may require considerable effort on the work of the producer, but since nobody now wishes to purchase these products, no added value has been created.

An added value analysis is not merely a quantitative analysis, it is a management tool that assists in the identification of strengths and weaknesses by the interpretation of the issues raised by the added value analysis.

1.5 Efficiency, effectiveness and economy

The successful accomplishment of a task reflects effectiveness, while performing tasks to produce the best outcome at the lowest cost from the same resources used is efficiency. Effectiveness is doing the right things; efficiency is doing these things better. The best performance maximises both effectiveness and efficiency.

A building decision is effective from the point of view of the client where this achieves positive outcomes. These may be outcomes in respect of financial measures that a developer may expect, or they may be outcomes that are socially effective and may be measured using techniques such as cost-benefit analysis. In a broad sense they represent good decisions.

Efficiency results in maximising the effectiveness of a project. For example, if a building design enhances productivity while costing no more in resources than competing designs, it is described as an efficient user of these resources. Where a building project offers the same level of performance as its alternatives and costs less, then this too is an efficient solution.

In order to be effective the project must meet the...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Foreword
• Preface
• About the authors
• Chapter 1 - The nature of added value
• Chapter 2 - The shift from cost to value
• Chapter 3 - Design and construction
• Chapter 4 - Cost planning
• Chapter 5 - Life cycle costing
• Chapter 6 - Value management
• Chapter 7 - Partnering
• Chapter 8 - Benchmarking
• Chapter 9 - Procurement
• Chapter 10 - Risk management
• Chapter 11 - Taxation
• Chapter 12 - Change and innovation
• Index