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The past few years have been interesting times in our industry. The financial promise of surplus capital has rivaled the fresh memory of 2008’s great recession. Our clients are pressured with decisions about growth, stock prices, employee costs, aging facilities and much more. These decisions are very difficult to make in a fragile economy. As a project team, our decisions aren’t as grand, but we are equally affected by the volatile marketplace.
The first half of 2018 has been quite the roller coaster for our project estimators. The combination of growing inflation, tariffs and a booming construction market has caused our estimators to have to go back and re-bid some scopes three and four times this spring and early summer. Estimates are now being stamped at the bottom: “This estimate is good for seven days.”
Let’s reflect on how a project budget is put together. A client thinks maybe they need a new building or remodel. At some board meeting, it is decided it might be a good idea to have a study done on the viability of the project, so a task force is created in the company to do the analysis. Some in the business would call this pro-forma. This analysis usually triggers the hiring of an architect and construction manager. The architect dreams up a master plan and the construction manager prices up such a dream.
The project budget the CM puts together is typically based on historical data. They might send it to some subcontractors to check their numbers, but you can assume the budget was a dollar per square foot rule of thumb. The really good CMs invest a lot of money into their estimating resources and data. The master plan team then adds a bow to the document and sends it off to the client. The owner’s project manager probably shares it with the board of directors for approval. If all goes well, the board will approve the project and the team will be on its way to beginning the project.
Fast forward about two years later to the design development value engineering meeting. You’re sitting there thinking to yourself, how did they even create this budget? There could be many reasons why the dream and reality didn’t align. The estimators couldn’t have predicted summer tariffs. Maybe the architect’s dream and the CM’s early budget didn’t really align as much as you thought. It’s possible the owner’s decisions haven’t really been the most cost-effective throughout the early stages of design. No matter how hard you analyze what went wrong, it won’t change the fact that you’re going to need to put your design on the chopping block.
This VE process has got me thinking about how we get here on projects and where did this idea come from. A good friend of mine, Chris Waldron, project manager for The Boldt Co., implored me to look into the history of value engineering. I’m not going to rewrite those findings in this article, but value engineering didn’t start out to be the process as you know it today. Google it and I think you’ll be enlightened on what you find.
The value engineering we know today is getting your path back to budget. It’s a term that some engineers despise. “What does it have to do with engineering?,” they want to know. I’ve heard it called enhanced value-added alternates. Each CM has some tool to help with this, such as a target finder, budget tracker or, in simple terms, VE Log. Either way, you’re going to find yourself in a room with the project team until you get back to budget – that same budget developed two years ago based off a rendering and a program.
The team will debate the value of terrazzo flooring versus copper piping. What does flooring have to do with piping materials? Nothing, but in this meeting, it means $240,000 versus $280,000. The project teams get to move onto construction documents and be done with this VE exercise. Why do they call it an exercise anyway? I don’t feel any healthier after.
The team will ask you for your list of items that your scope – in our case, division 22 – can offer up to the project team. What are you willing to sacrifice from your design? Are there any low-hanging fruit, something easy to eliminate? Somebody once told me a little VE is good for the team, almost a self-check that we weren’t getting carried away with the design. Maybe. I like to think we can design to a budget but maybe they’re right.
Theoretical Plumbing VE List:
The owner rejects items 1 and 7 and accepts item 3 from your VE list. The owner wants to see what the value is for the others on the list. Those items get priced up and you’ll have to take two of the remaining four to get back to budget. Oh, it turns out that going to scuppers is actually an added cost due to structural implications. Here’s an updated list:
Revised Plumbing VE List:
After reviewing the updated list, you’ve probably asked yourself again, how did we get here? That’s your pride talking to you. It’s really hard to not be proud of your design and when value is removed, it stings a little. It would actually be a little weird if you weren’t upset. Finally, after a lot more scrutiny, the owner decides they now want the RO system to provide water to the humidifiers. This completes your exercise and you’re now at your division 22 target budget.
Where do you go from here? I hope you explained to the project team what the redesign time will be to incorporate these items. Some VE solutions have been good opportunities on projects during schematic design but since you invested so much time into the design through DD’s, your design fee might cancel out any savings. This might be a frustrating concept for an inexperienced owner. The value of the investment is not only in brick and mortar but also in your design. You shouldn’t feel bad about it but make a mental note to include those numbers in your VE log, otherwise it creates a painful conversation later.
Now you have to essentially start over with the three VE items you and the team decided on. Did the design schedule change? You’re going to be asked to try and hit the same completion date. Make sure you know how much time it will take you to make the changes from your list. You’re going to have to change your specs, rerun your calculations on the new PEX, which has different velocities, pressure drop and hanger requirements. Don’t forget about plenum ratings. Deleting valves is not difficult in Revit. Also, don’t forget to archive your model; you never know when dollars will shift to pay for copper and valves.
What about the alternate plumbing fixtures? Do any of their requirements change your design? What if the new water closet flush valve requires a higher static pressure to operate, which will change the size of the booster pump? This would be what I call an unintended consequence of the VE process. On paper it looked like a simple saving from one water closet manufacturer to the next. Maybe your safety factor has you covered? Now you have an internal dilemma. Are you willing to remove the little safety factor you had to meet the new pressure requirements of the water closer?
If you increase the pumps, you’ll have to go back to the VE exercise. In my experience, it’s a difficult conversation but you should bring it up to the project team. They’re going to look for you to give them a recommendation. There’s a reason you design with a safety factor. Explain the value and show them the options and move on.
Finally, you’ve made it through the value engineering process! You have to move on and finish your CD’s strong. Don’t hold a grudge on the decisions that were made years ago. The origins of the conceptual budget could have never predicted the final design that sits before you. Chris Waldron and I have talked extensively on that initial budget number.
“There’s a difference between conceptual estimating and a detailed take-off,” Waldron says. “It’s more of an art than a science and those estimators have to be willing to be wrong. In conceptual estimating, some assumptions will be wrong; however, we want to be more right than wrong.”
This makes a lot of sense to me and should give us designers some perspective that we might not have had before. Those budgets are based on some imagery, a narrative and a program.
The conclusion of my budget conversation with Chris resulted in stressing team communication. If the owner, design team and CM are all on the same page with the scope of the project, you’re probably going to have limited risk in the conceptual estimate. “There needs to be trust between the three parties,” Waldron states. “You can’t have the design team and the owner thinking one thing and the estimator pricing another.”
There will always be external forces out of our control such as politics, tariffs and the economy. The one thing we can control is the communication of our designs to the estimating team. Get on the same page and make sure they understand your scope. It could help avoid a painful VE process.
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