Background
Value engineering, also known as value management or value analysis, is not a new thing. Pioneered by Lawrence Miles, an American engineer who worked for General Electric, the concept emerged during World War II in response to a shortage of skilled labour, parts and materials. Borne out of necessity, it was discovered that substituting these components could lead to lower costs and better products. Value engineering has been described as a ‘systematic and organised approach to providing the necessary functions in a project at the lowest cost.’[1] The main objective of value engineering is to optimise value by eliminating unnecessary cost while ensuring that essential functions and performance are met. You could say it’s a balancing act.
Value engineering in construction
Since the 21st century age of austerity (and probably before that) value engineering in construction projects has become synonymous with scope reduction to achieve cost savings. At worst, quality and safety may be comprised with disastrous consequences.[2] In 2018 Dame Judith Hackitt, author of Building a Safer Future, was highly critical saying that all value engineering does is cut quality and needs to be binned.[3] However, as long as the issues of product non-availability, budget constraints and the need to cut carbon emission exist the need for value engineering, done the right way, will continue.
Value management in NEC contracts
The term ‘value engineering’ is not uniquely stated or its meaning defined in the NEC contracts, however there is a range of options available to assist the parties in finding the optimum combination of cost and quality to deliver a sustainable solution which enhances value for money. Value management is not a process confined to establishing lowest capital cost but also takes into consideration a project’s whole life cycle and impact on the environment[4]. The provisions available within the NEC forms facilitate all these areas of value management.
Early Contractor involvement (X22)
The best time to commence value engineering is during design development as the impact of changes on cost and programme will be lower. Early Contractor involvement (ECi) is a secondary option (X22) available with the NEC4 Engineering and Construction Contract where the parties enter into a single contract with two stages. In stage one, the parties work together to develop the scope, design, price and programme. Involvement by the contractor during the planning stages of the project will enhance the contractor’s ability to influence out-turn cost to the client. The contractor is incentivised to seek savings against the client’s budget declared at the start of the contract. If the total cost on completion is less than the budget, the contractor is rewarded financially with payment of a budget incentive. You can read more about ECi and secondary option X22 by clicking here.
NEC4 ECC fixed price contracts (Option A and B)
The core clauses of the ECC allow the contractor to propose changes to the client’s scope providing the change will bring about a reduction in the amount the client pays the contractor (clause 16.1). If the proposal is accepted, the scope is changed by instruction from the project manager giving rise to a compensation event. The reduction in the prices resulting from the ‘negative compensation event’ is calculated by multiplying the assessed value of the compensation event by the value engineering percentage stated in the contract data (clause 63.12).
NEC4 ECC target contracts (Option C and D)
In Option C and D, the contractor is paid on a cost plus fee basis. The contract sets an initial target for the out turn price which is adjusted by compensation events. Any cost savings or overruns measured against the adjusted target price are shared between the client and the contractor according to the share ranges and percentages stated in the contract data (clause 54).
The contractor’s incentive to make cost saving proposal is provided for in compensation event clause 63.13. If the assessed value of a compensation event arising from a proposal made by the contractor under clause 16.1 reduces the total (defined) cost, the target price is not adjusted. The benefit of any subsequent realised cost savings for the whole of contract are then shared in accordance with clause 54. The extent to which the contractor is motivated to propose changes to the client’s scope under Option C and D will depend, amongst other things, on the share ranges and percentages.
Information Modelling (X10)
Information Modelling or ‘BIM’ is a process for creating a digital representation of the physical and functional characteristics of an asset for use throughout its whole life cycle. The process involves creating a model that show not just the geometry of the asset, but also information about its various components, performance and cost. The application of secondary Option X10 brings together the technical requirements for a project with provisions setting out the responsibilities for creating the model and liability of the parties. Information modelling facilitates value engineering providing visibility of both the function and cost of a design with the ability to readily examine the effects of design changes before committing to the construction stage.
Whole life cost (X21)
The cost of operating and maintaining an asset is a significant part of its whole life cost. Understanding the whole life cost of a project plays an important part in design and ultimately the decision to make the capital investment. Secondary Option X21 is available for use in the NEC4 Engineering and Construction Contract, Term Service Contract and Facilities Management contracts. The contracts make provision for contractor proposed scope changes with the objective of reducing whole life costs. Proposals must be supported by a forecast in cost reduction and analysis of the resulting risks and value engineering can play an important role in these assessments.
Climate change (X29)
Secondary Option X29 was published in July 2022 and is available for use with all of the NEC4 main and subcontract long form versions of the contract. This Option allows the client to include its climate change requirements with targets in the contract with the aim of bringing about a reduction of the impact of work on climate change. A performance table with financial incentives is used to motivate suppliers to achieve measurable targets on greenhouse gas emissions and other environmental performance criteria.
Conclusions
Delivering best value for public and private sector clients is fundamental to successful procurement and contract management. The UK Governments Construction Playbook identifies value as core objective in project delivery. The principles of value engineering play an important role in achieving best value.[5] NEC contracts provide an excellent framework with varying strategies to assist client’s in delivering best value within budget constraints without losing focus on safety, quality and the environment.
David Hunter
Daniel Contract Management Services Ltd
July 2024
This article was first published in the NEC User Group newsletter Issue No. 132 July 2024
[1] Building a Safer Future – Independent Review of Building Regulations and Fire Safety: Final Report, May 2018.
[2] Grenfell Tower fire June 14 June 2017
[3] Speaking at the Chartered Association of Building Engineers reported in Building Magazine: 08 October 2008
[4] Reading Elevated Railway redevelopment in which value engineering resulted in 40% reduction in embodied carbon saving 12% of original cost of the project – Rail Safety and Standards Board Sustainability Case Study May 2019.
[5] Fullalove: NEC UG Newsletter No. 130 March 2024 – Leeds City Council outer ring road