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!  

UniPhi 12 - Assets come to resources

Once again, UniPhi 12 has been driven by the needs of a new client in the property development sector. This major government agency required expanded and streamlined management of the developments they have from cradle to grave with this life span being as long as 40 years! This included the management of the status of their as built assets and the sub-division of them. UniPhi's resources module was easily adapted to allow for a new type of resource - Assets to be added.

The current target of this assets resource type are land and building assets and their sub-division into lots for eventual sale. However, I'm sure once this functionality in in the marketplace, there will be additional uses like plane hire management (linked to our timesheet module) and product builds for manufacturers.

In the meantime, we'll focus on supporting our current property development client with the asset management support they need. This includes the ability to add unlimited custom fields of various data types to classify and then search for assets, allocating assets to projects (ready for sale), assigning assets to a revenue contract and then reporting on the status of an asset.

Another new feature in UniPhi 12 that we needed to support the role out of assets as a resource is expanded resource custom fields. The brilliance of +Gunawan Herman can be seen through all this work. Resource custom fields can now be assigned at the organisation, site, contact and asset level. They have all relevant data types and are dynamically added to the particular type of resource's details page. They can be categorised and added in bulk. Probably the neatest feature is that they can be searched for and are returned dynamically as part of the results set. Finally, they are dynamically included in the template variable tool set for documentation. As can be seen from this, Gunawan is king of the dynamic interface design and implementation.

UniPhi users can now tailor their resource information to the data sets they need and then extract that information into "mail merged" documents, reports and dashboards. This represent an exiting expansion of the UniPhi feature set and we look forward to customer feedback on it.

UniPhi 12 - Net Present Value and IRR

When I hired my first software developer back in 2003, one of my main goals was to build a web based application that could replicate the financial models I was building at the time as part of the management consultancy (mbh consulting) that I was running. Key to this was the ability to build NPV (net present value) models. Opportunities in the construction sector meant that this feature was put on hold.....for 13 years! But finally, UniPhi 12 includes the ability to generate both NPV and IRR calcs for any type of investment.

Utilising the revenue/benefits/fees and the costs modules enhanced cash flow phasing method and adding a panel on the project summary for the discount rate, users can now get up to the minute NPV outcomes.

One of the most exciting aspects of this is the fact that the NPV re-calculates every time actuals are authorised and costs to complete updated. This means that sunk costs are always excluded from the calc (one of my pet hates for poor investment decision making) and the executive can now know what investment is currently the most valuable, which is usually the most recently completed as all its costs are sunk and all its benefits remain to be harvested.

Hopefully, this new feature can bring back the push mbh consulting had years ago for much more focus on benefits management and will drive investment decision making around leveraging previous investments over new ones and exercising those call options that these investments represent!