CEE 422: CONSTRUCTION COST ANALYSIS

Comprehensive/Holistic Value
Engineering and Value Analysis
Approaches in Construction
Research Paper

Saumil J Mehta
11/26/2010
 Abstract

Traditionally value engineering has been defined as the process of relating the functions, the

quality, and the costs of the project in the determination of optimum solutions for a project.

However, with the growing awareness of environmental and social issue it has been recognized

that a definition of value that focuses only on economic efficiency is unsuitable. Also there is a

need to quantify and analyze life cycle costs upfront (as opposed to just construction and design

costs) and . Hence an evolved and holistic approach that can facilitate the integrated

consideration of social, economic and environmental issues emphasize the need to develop a set

of metrics for assessing and optimizing the lifecycle value of the built environment.

Several new technologies focusing on life cycle modeling for energy, water and electricity have

been developed to provide a better metric of value. The values of environmental protection and

energy efficiency have also been promoted by certifications awarded by Leadership in Energy

and Environmental Design (LEED) Green Building Rating System™ based on performance

across metrics such as energy savings, water efficiency, CO2 emissions reduction, improved

indoor environmental quality, and stewardship of resources and sensitivity to their impacts.

However measuring the social impact and quantifying its value in monetary terms has always

been a challenge. Moreover there has been a lack of consensus on which absolute measure of

value can best measure progress towards all such issues concerning sustainability. At the same

time the purpose of integrating the three spheres is not merely to define a combined set of

environmental, economic and social objectives, but to reconcile potential conflicts between them.

This paper shall focus on summarizing some of the current work on developing a holistic

approach to value engineering for analyzing construction projects and the challenges faced in

such an endeavor.
 1. Introduction

Over the past decade, the sustainability of the planet has becomes an issue of greater

international concern, and the continuation of traditional modes of development have become

more questionable. However for these concerns to take effect, there has to be a greater

understanding of the issues related to sustainability and the economic trade-offs involved in

development processes. One of the biggest industries that directly affect the use of raw material

and carbon emission is the construction industry. In the recent past, several standards and rating

systems like LEED have been developed to evaluate construction projects in terms of their

impacts. However, little has been done to answer the larger question of value addition of a

project. The aim of this study is to survey various approaches that can allow a holistic evaluation

of construction projects.

2. Background

Current methodologies in project performance measurement are limited to impact evaluations

and provide little scope of improvement. The traditional process which begins with the civil

engineers and architects, who make the early conceptual design decisions followed by

environmental engineers and scientists and local political groups who attempt to patch their

environmental and social equity issues onto these early conceptual designs late in the process.

Such a process is sub-optimal because it does not allow lifecycle costs, environmental concerns,

and social equity stakeholder issues as modifications to a conceptual design that has been

effectively locked in through early financial, legal, and regulatory approvals and covenants. Our

recent awareness of economies, societies and ecosystems as complex adaptive systems that
cannot be fully captured through a single perspective further adds to the argument. Failure to

describe these systems in a holistic manner through the synthesis of their different non-reducible

and perfectly legitimate perspectives amounts to reductionism.

Most conflicts seem to be rooted in a narrow perception of value understood by different

stakeholders. The aim of this study is to tackle the problem of interpretation and assignment of

value from an archaic standpoint and the challenges involved in developing holistic approaches.

All approaches to define value holistically depend on a certain set of assumptions and what

distinguished each approach are the assumptions themselves. Three chief approaches shall be

outlined and discussed and an attempt to expose the advantages and limitations will be made

based on their assumptions

i. Bottom Line Approach

ii. Multidisciplinary analysis and visualization tools for project planning

iii. Developing richer conceptual framework like

3. Bottom Line Approach

The “bottom line” is a metaphor arising from within the business lexicon that confers the ability to

capture in a unique representation (a number) the effect of a multitude of separate actions

(transactions) by systematically representing these actions using a common metric and summing the

contributions (benefits) and detriments (costs). The quintessential symbol of the bottom line is the net

income (earnings) reported on the financial statements of publicly held corporations. Net income is

the difference between the revenues of a period generated by selling the products or services,
capturing the organization and the costs of producing and selling those products or services and

purportedly captures the organization’s inflows and outflows in a single figure. As a metaphor, the

bottom line (net income) represents information capture of a collection of activities enabling the

synthesizing of the effects in a concise representation. The requisite unit of measure is presumed to

be compensatory, additive, inclusive, and, to be useful, relevant.

Figure 1: Traditional Project Evaluation Process

A new reporting technique being developed is called the “triple bottom line” reporting technique

which applies the bottom line metaphor to the social and environmental aspects of a business
organization. The legitimacy of such an application depends on the extent to which the

characteristics of the application domain (social and environmental) conform to those of the

initiating domain (economics/accounting). Environmental Accounting is usually done using

rating systems. For example in the US, Leadership in Energy and Environmental Design (LEED)

is often used as criteria for selecting projects.

Figure 2: Project Evaluation using Triple Bottom line

Development of rating systems such as the Leadership in Energy and Environmental Design

(LEED) Green Building Rating System™ are meant to improve performance across metrics such

as energy savings, water efficiency, CO2 emissions reduction, improved indoor environmental

quality, and stewardship of resources and sensitivity to their impacts. Each of the above criteria

are awarded a certain number of points and then summed up. LEED 2009 for New Construction

and Major Renovations certifications are awarded according to the following scale:

Certified 40–49 points

Silver 50–59 points

Gold 60–79 points

Platinum 80 points and above

Social benefits are usually measured in terms of reduced travel time, better connectivity, service

offered to community by the infrastructure and so on. These are harder to quantify.

Limitations of Bottom Line Approach

The major assumption in the bottom line approach is that costs and benefits of components can

be calculated individually and reduced to monetary values or basis points which are used as sole

guidelines for project approval. Some researchers have even criticized the bottom line as a

disconnected and misconstrued metaphor when it is applied within the guise of triple bottom line

reporting and provides little, if any, utility for organizations or their stakeholders. As argued

above, the application of the bottom line metaphor, as currently construed, represents a limited

and conceptually flawed application. It then follows that the resulting triple bottom line reporting

would also be flawed as a portrait of the three categories of sustainability. The categorical
reporting moves from the traditional economics based business-related concept of bottom line to

broader, more ill-defined, and non-rigorous concepts of the environment and the social systems.

Even standards like LEED are inadequate because of lack of a weighting system based on

climate, bioregion, and local factors (Kibert and Grosskopf , 2006). It does not, for example,

address the future extraction of resources from the building and it barely addresses the

composition of the products that comprise buildings. Although sustainable forestry is certainly

an important issue, this point, as is the case with several others, is subject to a certain amount of

gamesmanship in which products are specified solely for the purpose of achieving this point. In

order to positively evaluate and reward innovative design which is integrated with local

ecosystems, rather than putting a cap on the maximum points that can be earned by eco-friendly

projects, a holistic analysis of project value is necessary. The triple bottom line report gathers

together the three legs of sustainability but provides no focus and fails to address, even at a high

level, the need to arrive at some salient point, some essential value. The bottom line is a

disconnected and misconstrued metaphor, with no real utility for organizations or their external

stakeholders when operationalized within the triple bottom line statement [3].

4. Understanding Impact using Visualization Tools

One of the reasons why stakeholders do not reach a consensus is lack of ability to visualize the

project in its totality. Development of visualization and graphical tools have opened up

possibilities to overcome this limitation and provide more information about the project at the

design phase itself through prototyping, modeling and forecasting techniques. For example,

visualizing the energy flow can give a better picture of future energy demands and the chance to
minimize current load if the energy modeling division is aware of other components of the

system. This is specifically provided by BIM.

4.1 Integrated Project Delivery using BIM

The traditional business environment within the AEC industry is fragmented and rarely do

stakeholders within the total life cycle of the delivery and use of facilities, within the total life

cycle of the delivery and use of civil infrastructure systems, and within the total life cycle of the

delivery and use of technologies, systems, products, materials, and equipment have a

collaborative interaction with each other. The tendency is for each one to operate independently

of the others. Several efforts have been made to overcome fragmentation and segregation of

design and construction activities. BIM is an approach to building design involving the use of a

digital building model created from coordinated, consistent design information enabling whole-

building analysis, faster decision-making, and better documentation. Integrated project delivery,

enabled by BIM, is based on the following strategy: cross-functional project teams collaborating

on a building’s design, construction, and lifecycle management for optimized owner outcomes,

using collaborative, model-based technology as a platform.

Figure 3: BIM software uses a centralized, parametric model allowing automatic coordination of

all plans, quantity takeoffs, and other related documentation (Middlebrooks, 2008)

BIM also provides a platform to build tools to measure building performance in an effort to

minimize energy consumption of buildings. Leading BIM vendors such as Autodesk, Benteley

and Graphisoft have created products that are integrated with BIM to support “one-click” energy

analysis. These are typically based on importing building information models in standard formats

and applying statistics to obtained models. These approaches focus mainly aspects such as solar

exposure, thermal performance, acoustics, lighting, shading, etc., during schematic design as

well as design development.

4.2 Geographic Information Systems

Just as BIM can be particularly useful to measure energy performance, GIS also has a significant

role to play in terms of determining social impact of infrastructure projects such as roads,

hospitals, manufacturing plants and so on. GIS is often recognized ‘as a decision support system

involving the integration of spatially referenced data in a problem solving environment’. Hence

GIS can be considered as a rudimentary Community-based Geographic Information gathering;

the use of different coding methods allows for the composition and storage of thematic

information layers; this in turn facilitates community-based analysis of spatially-defined

information and the display of results. The tool processes existing data and its output(for instance

the change in policy by decision makers in favor of society welfare), providing the foundation

upon which public participation GIS can release in its full potential, by displaying multiple

realities and conflicting interest through the eye of all concerned stakeholders. This can be used

as a platform for communication and dissemination of information which can link community

participation and Geographical information in diversity of social and environmental context. In

order to fulfill the vision of GIS to make contextual decisions, a consensus building exercise

must be performed where shared beliefs and values can be negotiated and defined (Malczewski,

2004). GIS is often combined with Multi-criteria Decision Analysis since MCDA provides a rich

collection of techniques and procedures for structuring decision problems, and designing,

evaluating and prioritizing alternative decisions.

Figure 4: Regions of Sustainability to visualize landscape as a sustainable unit (Ball, 2002)
Limitations of Visualization Tools

Information schema evolution through time to support changing project or industry contexts is

not fully catered for by standards such as IFC or STEP. Another limitation of from data-centric

application integration is the inability to capture work processes and people’s knowledge.

5. Development of richer frameworks

Although most collaboration technologies have tried to overcome the fragmentation across

various domains, little has been done to improve the “process” of project design and planning.

Providing formal foundations to the requirement phase is critical because it has been identified as

the most error-prone, and these errors are the most expensive to correct and continues to be the

cause of high failure rate of large infrastructure projects. One of the biggest obstacles is the

polarity between the languages used by the clients, suppliers and other stakeholders. Relying

merely on visualization techniques to overcome the language barrier between all parties may not

be enough to reach the best possible design for a project.

The continuing evolution of semantic forms developed by computer scientists has lead

researchers to investigate ontology-based systems to overcome the above limitations. Ontologies

provide a framework for representing, sharing, and managing domain knowledge through a

system of concept hierarchies (taxonomies), associative relations (to link concepts across

hierarchies), and axioms that allows reasoning in a semantic way. For example, the words in the

planning ontology are technical terms that govern the form of inputs and the interpretation of

outputs. The definitions tell the user of a planning system what information must be given about

an “event” or “resource” in order for the planner to be able to use the information. Each program
must commit to the semantics of the terms in the common ontology, including axioms about the

properties of objects and how they are related.

Figure 5. Evolution of semantic forms

One of the key factors that make ontologies superior to taxonomies or product models in terms of

semantic richness is the use of axioms. Axioms, constraint the interpretation and well formed use

of terms formed within ontology. This means that using axioms makes ontology more systematic

and well-defined, moving closer to the goal of a common language and leading to greater

integration of different perspectives. Different stakeholders such as planners, engineers,

architects can exchange understand project components and processes from a holistic standpoint

by accessing and discovering the meanings provides by axioms and inter-relationships in

ontologies of other domains.

 6. Process Guidelines

The paper highlighted the difficulties of taking a completely quantitative approach and the

uncertain possibility of developing an ontology which would be agreeable to all stakeholders as a

basis for communication and setting out the criteria for project evaluation. To take advantage of

the above approaches without conflicts, some guidelines about the process should be established.

A few helpful process guidelines are discussed in this section.

6.1 Integrated Reporting

The essence of one report is the integrated presentation of financial and non-financial

information and the relationship between different types of performance outcomes. The benefits

of such a program would be enormous. Investors and securities regulators would get a clear view

on what companies regard as their key performance metrics. This would be useful input in future

efforts to simplify financial reporting, codify standards for nonfinancial reporting, and begin to

establish guidelines for companies to publish a single integrated report. In identifying and

reporting in a single document the truly material financial and nonfinancial metrics and

relationships between them necessary to understand a company's past performance and future

prospects, an integrated report will reduce the complexity that comes from detailed information

of little value and the cost of issuing multiple reports. Integrated reporting is a way of solving

two problems at once: the burden of increasing complexity and cost of financial reporting, and

the growing demands for nonfinancial information.

Putting all performance information into One Report in an integrated way challenges all

stakeholders to take a more holistic perspective. Shareholders cannot just focus on short-term
profits; they need to understand that a company's ability to earn profits over the long term will

require investments that come at a short-term cost, or even value transfers that preserve its

legitimacy and continued existence in order to earn profits in the future. Conversely, other

stakeholders need to understand that companies need to make a profit in order to survive and

grow.

6.2 Trial and Design

Design of infrastructure projects can benefit immensely by taking input from all stakeholders in

the early phase of the project. In order to accommodate the criteria and concerns of all

stakeholders effectively, condition that encourage the possibility of agreement among

stakeholders must be encouraged. This is not only determined by better information and

visualization of outcomes but more by an ability to align different perspectives of stakeholders.

One way of proceeding toward a unity of agreement in which stakeholders concur by letting each

group behave as itself any fusion will be natural and expansive rather than restrictive or imposed,

the resulting organization being more the result of ante posteriori ‘affectual adjustment’ than an

a priori rational regulation. Such a method is termed a trial and design method. A trial-design

method of evaluation does not require values being subjected to a Cost-Benefit Analysis (CBA):

one where the ‘engineer’ becomes an ‘architect’. The architect takes an outline of the client’s

values and needs specification, draws up a series of draft alternatives and then consults with the

client and other stakeholders as the process develops. Rather than use any ‘finalized’ CBA

weightings, evaluation takes place through a series of increasingly informed client and

stakeholder choices, each of which requires active and responsible involvement. The trial design
method invests in sustainability as an organic process rather than a series of one-off

considerations that foreclose upon opportunities unforeseen at the inception of the brief.

6.3 Project Appraisal based on Axiology

Tools like BIM which are based on taxonomies and product models face one inherent limitation

that prevents the maximization of project value. These systems are unable to support decision

embedding and recording of design intent (a feature that is supported to a limited extent with

product data models). This lack of documentation often leads to errors in design when

downstream decisions are made based on conflicting assumptions. This can have several

disadvantages. For example, it makes change management highly cumbersome. Changes in

project design to meet new requirements may be valued differently by various stakeholders and

decisions cannot be made unless the value concerns of all parties are satisfied.

Design of infrastructure projects can benefit immensely by taking input from all stakeholders in

the early phase of the project. In order to accommodate the criteria and concerns of all

stakeholders effectively, a value model must be defined to provide the framework for global

optimization at the requirements phase of the project. A value-driven approach (by defining a

value model ex-ante) can be important in overcoming the limitation in design process which

typically follows a cycle of first modeling the system, analyzing the impacts, making changes

and again analyzing the impacts. Such a framework will include a formal axiology or a theory of

values for lifecycle operations of infrastructure projects.

The programmatic study of values or axiology is concerned chiefly with the nature of value. It

involves three tasks: “(1) the grounding of a genetic conception of value to provide a unified

basis for the wide diversity of contexts in which the evaluation takes place, (2) the study of the
phenomenology of valuation in general, and (3) the development of a system of value axiomatics

codifying the universal rules of valuation”. Furthermore, axioms enable the language designer to

express his general intentions quite simply and directly, without the mass of detail which usually

accompanies algorithmic descriptions. Finally, axioms can be formulated in a manner largely

independent of each other, so that the designer can work freely on one axiom or group of axioms

without fear of unexpected interaction effects with other parts of the language.

7. Summary

Almost all approaches discussed in this paper call for a need for greater integration. The

integration can be at various levels and the deeper and richer the integration, the more holistic

will be the project evaluation. Broadly these can be classified as follows

1. Environment economy and equity are not necessarily independent silos that are evaluated

independently

2. Allowing stakeholders (including NGOs) to discuss and share multiple concerns and

hopefully achieve consensus

3. Enabling integrated governance for global supply chain

4. Overcoming the traditional barriers of civil engineer versus environmental engineer

5. Replacing the linear process of project design followed by impact studies and social interest

groups

Some of these approaches have been implemented in some pilot projects around the world and

these needs to be studied in detail with respect to financial statement of companies, pubic
approval and environmentalists’ protests. Research in this area could study the effect of different

project governance approaches for gathering stakeholder input and allocating costs and benefits

continuously to different affected populations over the lifecycle of a project In general a

combination of all approaches will work better than any single approach since they can mutually

cancel out individual limitations

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