Thursday, September 15, 2016

Cost Management Series I - Adding Value to the Value Management Conversation

Value management
Value management is a methodology mainly used in the construction industry to do what most commercial organisations would call benefits management. However, in my experience, much of the value management discussion conducted in workshops or in after workshop documentation doesn't really focus on the real final benefits of the building being designed. Most discussions look at precursor factors to value like number of desks per sqm, number of meeting rooms, green star and the like. This is mainly because these things are easy to value.

Best Practice
This is where the cost consultant can come into their own. By knowing the key benchmarks and by being able to quickly analyse where the variance occurs and how much things vary for every quantum or rate change then at worst they can input into the investment side of the debate. For example, a cost consultant being able to quickly advise that removing 10 workstations and adding two multi-media meeting rooms will cost an extra $50,000.

Key to this best practice is the development of volume and rate variances. Each time a cost plan is updated, the cost consultant needs to be able to quickly identify the volume change, the rate change and the monetary impact of those changes and this needs to be done on a functional and elemental level. Again, an example of a change in design and type of windows leads to an increase in costs of $2m but this is driven by a $3m increase in the price of the windows offset by a $1m saving in scope. Now it might be that this design reduces heating and cooling requirements that leads to a 4 star Green Star rating but the reduction in size and number leads to reduced natural lighting. The investor may then review the value in keeping the original design but just change the quality of windows as it is only a $1m saving for a reduction in potential comfort of the space.

A sample view of this type of data can be seen in the screenshot below:

Variance analysis at the elemental level - download image for original size.

Variance analysis displayed graphically

Equally, it is essential that the cost consultant has the knowledge and time to complete extensive sense checks on these value management estimates as they're often time constrained, are not completed from first principles and can rely on benchmark data to create.

Software can provide significant value to this by automating the calculation of volume and rate variances including the monetary valuation of these changes (not merely the quantum) and by auto calculating the sense checks that verify the veracity of the estimate. As per previous blogs, benchmarking, leveraging the data captured on previous projects and using this to validate the estimate is essential.

Future disruption
As can be seen here, the variance analysis needs to be centred around whether the extra benefit is worth the extra investment, not just what the design parameter changes cost. There needs to be a higher level conversation that matches the goals of the investor. For example, in a fit out example, what's the staff profile and growth prospects of the business? What is their hot desk policy? How are they expecting this new fit out to change staff retention rates and what is the $ value saved in terms of re-training and knowledge loss? As a cost modelling expert, it should be possible for consultants to extend their capabilities into the benefit side of the equation and use their modelling skills to provide input into the value management conversation.

Again, software can help here by quickly aggregating the bottom level benefit drivers into the overall $ value assessment and linking the net benefit/deficit of a change in one design over another. Perhaps the future will see the Cost Manager become the Value Manager when benefits are factored into their cost modelling!  
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