Value-for-money in project delivery
by Grace C. Lin, AIA, CDT, DBIA
What is Value-for-Money (VfM)?
According to the World Bank, value for money is “the effective, efficient, and economical use of resources, which requires the evaluation of relevant costs and benefits, along with an assessment of risks, and of non-price attributes and/or life cycle costs, as appropriate.”
Why is VfM important?
The VfM analysis considers the optimum combination of the project life cycle costs and quality of the goods and services to meet the Owner’s Performance Requirements (OPR). Some fundamental questions are: Is there a fit for the purpose? What are the possibilities to achieve greater “value for money”? Do the design and specifications provide value for the money?
The OPR encompasses performance-based specifications, long-term agreements for new or existing assets and services, including agreements paid for by service or end-users. The VfM analysis plays an important role in many P3 programs.
How is VfM used?
The VfM is used for cost-benefit and options analysis to inform decision-makers whether to select and implement, whether to approve or reject the proposed design and construction elements, material specifications, building systems, or other building components, and pursue the project. VfM analysis typically involves both qualitative and quantitative analysis. For example, the assessment criteria include feasibility, economic, and commercial viability of the proposed design and its impact on the project. What is the likelihood of the proposed design to provide adequate Return on Investment (ROI) to attract good-quality investors? Is the proposed design affordable? How will design specifications perform to fulfill the financial obligations of the project? The VfM analysis is used to plan cost, track cost, manage risk, and stay within available funds for a realistic built environment that meets the OPR.
When is VfM best employed?
The earlier stages of VfM analysis are crucial for decision making; however, the later stages also need to be monitored attentively, constantly manage emerging risks, double-check earlier decisions or conclusions, as the design develops, and more information unfolds. As a rule of thumb, there are five stages of VfM analysis:
- Project inception and overall programming phase
- Conceptual level, all design development, and construction document phases
- Prior to the launch of the procurement
- Final VfM check (e.g., bid comparison)
- Before GMP agreement and contract execution
VfM Relevance in P3
Whether assessing different procurement and delivery options, a proposed design, or other goods and services, the VfM analysis requires a long-term consideration and can be a challenging undertaking. Making decisions in the early stages for a long-term impact can be intimidating. With design-build, knowledge is brought forward into the process to inform decision making. Identifying metrics that matter will help inform how to approach the reiterative processes of design using Target Value Delivery (TVD), value engineering, and business decision-making. Provided market conditions don’t vary and a comprehensive analysis is done immediately prior to the VfM assessment, the traditional procurement model can be used to compare and transfer risks with incentives, experience, and innovation, to improve service delivery efficiencies over the entire project lifecycle. The ability to allocate or transfer risks effectively involves, but is not limited to, the following best practices:
- Develop a set of suitability criteria, with market input, based on long-term and predictable needs for the services and building operations through performance-related payments (e.g., service fees, rents) and ensure sufficient capital at risk
- Ability of the private sector party (i.e., developer) to manage risk and take responsibility for delivery
- Integrate building lifecycle approach to managing the project (e.g., digital twin)
- Set affordability ceiling to project, use TVD and Choosing-by-Advantage (CBA) to achieve Value-for-Money savings
- Define a “project scope ladder” to identify the hierarchy of priority-related specifications
- Stability of the governing institution’s policy and stakeholder support
- Presence of a competitive bidding market
- Commercial attractiveness
- Assess the potential for optimal risk allocation
- Qualitative analysis first then quantitative analysis later
Practicing VfM analysis can be taxing but there is much to be gained from it. It alleviates rework, cost, and delay, that often occur in design-bid-build delivery. VfM enables decision-making by weighing the cost against the associated benefits for Owners to strike a balance between qualitative and quantitative approaches. For example, in a progressive design-build project delivery method, there is very limited data to inform assumptions for quantitative analysis. Hence, a greater emphasis is given to scrutinizing the qualitative aspects of decision-making. Qualification-based selection (QBS) is used to recruit and engage the appropriate subject matter experts and experienced professionals that are critical to ensuring proper inputs for optimum outputs towards achieving value from a project both in its design and implementation. The VfM analysis promotes the transparency of delivery as well as metrics. It is a “must-have” examination of the risk transfer and development process. Such thorough and systematic risk management is a critical part of the project delivery and is instinctive for continuous improvement. The results of VfM analysis may inform the risk and reward and set the bottom line of the envisaged project.
Grace Lin, AIA, CDT, DBIA, is an Owner’s advisor. As a Senior Project Manager at CBRE, among her roles are to provide advise clients on procurement strategies and set out project delivery blueprints. She enjoys collaborating closely with clients and industry partners. Understanding her clients’ needs and challenges is the foundation of her customer care enabling Owners to make informed decisions. Recently, a procurement process for a P3 project sparked some questions and motivated Grace to write about this case study - “Value-for-Money in Project Delivery” - which is a subject of spirited dialogue that benefits Owners and the project team. Using VfM in the development process requires the right balance between qualitative and quantitative approaches.
As the former chair of AIA’s Project Delivery Knowledge Community, Grace invites you to join the Project Delivery Symposium 2022: Delivering the Future, from March 8th to 10th. Owners, architects, engineers, and constructors will join to discuss the latest strategies for driving successful project outcomes including best practices, allocating risk, and employing tools in project delivery.