Chapter 12. Project Cost and Value Management – Construction Project Management: Theory and Practice

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Project Cost and Value Management

Project cost management, collection of cost-related information, cost codes, cost statement, value management in construction, steps in the application of value engineering, description of the case, value-engineering application in the case project

12.1 PROJECT COST MANAGEMENT

A project consists of a number of activities. Each of these activities consumes resources. Resources cost money. We can take certain steps through which we can control the costs of these activities. Project cost management is all about controlling cost of the resources needed to complete project activities. Apart from these controllable costs, there are certain aspects over which we do not have any control. These are called uncontrollable costs and they are the subject matter of risk management, taken up separately elsewhere in the book. The subject of project cost management can be taken up in four broad steps, as explained below.

12.1.1 Resources Planning Schedules

This aspect was discussed in the previous chapters. The objective here is to prepare different resources schedule such as labour and staff schedule, material schedule, plant and equipment schedule, and subcontractor or specialist’s schedule. As mentioned earlier, these schedules show the quantity requirement of each of these resources either on a weekly basis or on a monthly basis. The basis for preparing these schedules is the project time schedule.

12.1.2 Cost Planning

Once the resource requirement is obtained, the estimate to complete each of these can be prepared based on the unit cost of the resources and the total units of the resources required. This process is called cost planning and it is a must for project cost management. The essential components of a cost plan are the project schedule and estimates. We have already discussed the project scheduling aspect in Chapter 7. The estimation aspect was covered in Chapters 4 and 8. It can be recalled that the estimate of a project is progressively developed as the project gets underway. To start with, a rough estimate based on previous projects of similar size and nature is prepared at the conceptual stage. This is gradually refined and finally a detailed estimate is prepared when the scope gets clearer and a detailed design is ready.

Cost planning aims at ascertaining cost before many of the decisions are made related to the design of a facility. It provides a statement of the main issues, identifies the various courses of action, determines the cost implications of each course, and provides a comprehensive economic picture of the project. The planner and the quantity surveyor should be continuously questioning whether it is giving value for money or whether there is any better way of performing the particular function.

At the detailed design stage, final decisions are made on all matters relating to design, specification, construction and others. Every part of the facility must be comprehensively designed and its cost checked. Where the estimated cost exceeds the cost target, either the element must be redesigned or other cost targets reduced to make more money available for the element in question—through all this, the overall project cost limit must remain unaltered.

The planner and the estimator should be continuously examining the cost aspects throughout the design process, and keep asking certain typical questions—‘Is a particular feature, material, or component really giving value for money?’ ‘Is there a better alternative?’ ‘Is a certain item of expenditure really necessary?’ Cost planning establishes needs, sets out the various solutions and their cost implications, and finally produces the probable cost of the project while maintaining a sensible balance between cost on one hand and quality, utility and appearance on the other.

12.1.3 Cost Budgeting

Cost budgeting is the process of allocating the overall cost estimate to individual work items of the project. Work items are groups of similar activities taken from bill of quantities. It is not necessary to go into each item of bill of quantities since that would require too much of the planning engineer’s efforts without commensurate results. In practice, similar activities such as excavation in open might be clubbed with excavation up to depth of 1.5 m, and excavation from 1.5 m to 3.0 m depth under one common head, excavation work. Similarly, concreting of different grades given in the bill of quantities can be grouped under one common head ‘concrete’. Although the rates quoted by the contractor may be different for different grades of concrete, it will be a huge task to allocate the cost to individual grades of concrete since that would require creating large numbers of cost codes. The same result can be achieved if the work items are created based on some weighted average techniques.

12.1.4 Cost Control

The objective of cost control is to ensure that the final cost of the project does not exceed the budgeted or planned cost. Project cost control can be seen as a three-step process:

  1. Observe the cost expended for an item, an activity, or a group of activities.
  2. Compare it with available standards. The standard could be a predefined accepted cost estimate (ACE) or it could be the tender estimate.
  3. Compute the variance between the observed and the standard, communicating any warning sign immediately to the concerned people so that timely corrective measures can be taken.

The initial stages of the project such as conceptual and design stages offer the maximum possibility for influencing the final project cost. Thus, regular and close monitoring is needed during these stages of the project. The details of cost control aspects are discussed in Chapter 16.

12.2 COLLECTION OF COST-RELATED INFORMATION

In this section, we discuss the collection of actual cost figures or data and the different reports that are prepared to collect such data. The cost of an item or an activity is collected essentially under the following broad heads (refer to Figure 12.1):

  1. Labour costs, which include departmental labour and subcontract labour
  2. Material cost
  3. Plant and equipment cost
  4. Subcontractor cost
  5. Consumables cost
  6. Overhead cost

Figure 12.1 Major cost heads and relevant documents to assist in cost compilation

 

In some cases, there may be further split-up of the above cost heads in terms of direct expense and indirect expense. For example, the total labour cost would be the sum of direct labour expenses and indirect labour expenses.

There are certain standard reports maintained at sites to record the above-mentioned costs, as illustrated in Figure 12.1.

12.2.1 Labour Cost

As mentioned earlier, in a project there can be two types of labour—one that is directly employed by the main contractor and the other employed by the subcontractor of the main contractor. While the former is referred to as departmental labour, the latter is called subcontractor labour. There are different costing processes adopted for these two categories of labour.

Figure 12.2 A typical format for recording daily labour attendance

While the source document for collection of departmental labour cost is the daily labour attendance and allocation form, the source data for knowing the subcontract labour cost is the subcontract bill. In addition, there is a certain component of miscellaneous labour that cannot be associated with any activity cost codes; they are termed as miscellaneous labour and find their place in overhead cost.

Normally, two accounts are maintained, one each for departmental labour and subcontractor labour. Daily labour attendance is maintained mentioning the relevant cost code.

It is possible that a worker may be used for more than two works having different cost codes. In such a situation, it is advisable to keep the worker’s expense under only one cost code for that particular day. While preparing the labour attendance sheet, it is a good practice to check the cost codes against each such worker. The labour cost for each cost code is determined by multiplying the number of days in each cost code with the average man-day rate for that month. Average man-day rate is worked out from the total gross wages divided by the total man-days worked in that particular month. To keep the calculation simple, although the overtime amount paid to workers is taken in the gross wages, overtime hours are not considered in the denominator while calculating the number of days.

The cost code mentioned in the wage sheet is also summarized in labour cost allocation on a monthly basis to arrive at the total number of man-days worked for each cost code. It is a good practice to check whether the total of cost code-wise man-days and the total man-days worked are matching.

Notice pay, retrenchment compensation and employer’s contribution to provident fund for labour are part of indirect labour costs, and these go under the project’s indirect costs.

12.2.2 Material Cost

Materials used at construction project sites are basically of two types:

  1. Client’s supply: This is issued by the client for the execution of project. The owners may issue it on free-issue basis or on chargeable basis. While the former will not have any effect on cost statement, for the second case it is imperative that total quantity of the supplied material consumed is allocated cost code-wise and pricing done at agreed rates. Necessary provisions for wastage and inventory-carrying cost (like cost of storage sheds, handling charges, etc.) should be made for both categories of materials.

     

  2. Own purchase: The materials that a construction company purchases could be of the following types:
    1. Bulk or basic materials

      Items such as aggregates and sand can be termed as bulk or basic materials. For costing purpose, the total quantity consumed, including wastage, needs to be allocated cost code and priced on periodic weighted average rate (PWAR) basis.

       

    2. Heavy tools

      For such items, indents are prepared each month for write-off as suitable percent of cost on written-down rate basis to cover wear-and-tear and allocated to relevant cost codes. If any item is rendered unserviceable, the entire residual value is written off.

       

    3. Scaffolding/staging materials

      For these items, indents are to be prepared for rentals at suitable rates of value of materials cost per month and allocated to relevant cost codes.

       

    4. Temporary structures/installation

      Some common temporary structures at a typical site would be contractor’s office, client’s and consultant’s office, workshops, labour colonies, etc. For costing purposes, proportionate cost to invoicing done till each month-end is written off. Necessary credit for possible/realistic salvage value is also sometimes considered.

       

    5. Small tools

      Small tools are charged fully at the time of first issue. In other words, the value of the small tools is written off at the time of issue by stores and charged to relevant cost code.

The source document for collection of material cost is the indent, which is shown in Figure 12.3.

In a large organization, material can be procured either locally at project site or from the central depot of the organization through centralized procurement. The moment any material is received at a project site, site stores personnel prepare the material receipt note, commonly referred to as MRN, and the total cost of the material is booked in this project by the central procurement department. The cost allocation at site is done by looking at the cost code mentioned in the indent received from project engineers.

Suppose a project engineer needs a particular material. He will raise the material indent in which details such as item description, brief specification, unit of measurement, quantity, rates and cost code of the work head for which this material is needed are required to be filled up. The project engineer fills up the indent form leaving aside the rate part, which is usually filled up by the stores personnel. Care should be taken to fill the cost code correctly. Wrong entry of cost codes can give an erroneous result while reconciling the material cost for a particular work head. This is the reason indent-raising authority is given only to a few people at site, and moreover, these entries are usually crosschecked by the planning engineer on a day-to-day basis.

Construction companies follow certain guidelines while compiling materials cost. No material cost is debited unless material receipt note is prepared at site. The value of goods purchased is based on purchase journal. The issue of material to the site is made on the basis of periodic weighted average rate. In case of transfer of materials from one site to another, debits are raised at site at PWAR based on acknowledged copy of delivery challan. For certain items of work (like concrete, formwork, or excavation) where there are subdivisions and for which collection of cost for each of the subdivisions may be difficult, the sub-items should be clubbed together under one single code.

Figure 12.3 A typical indent format for requisition of material used in projects

Soon after the monthly bill is submitted, the cost statement, indicating the cumulative cost of each item under the relevant cost code booked till the date of the monthly bill, will be prepared. The cost statement will contain the split-up cost for each item of work (under corresponding code)—i.e., amount spent on labour (departmental and subcontract), materials (basic materials and consumables and spares), and overheads. Plant costs will be taken from plant cost statements (hire charges + operating costs) and included into work items as far as possible. Corresponding quantities of work done will be taken from the monthly bill to be included in JCR.

The costs in the cost statement may include amounts spent on portions of work in progress but not billed, as also amounts spent on certain enabling works like staging for formwork, precasting yard, partly fabricated structures, erection tools and tackles, which may be used for the balance work. It may, therefore, be necessary to remove from the cost all such amounts so as to assess the true cost of the quantities invoiced. The planning/billing engineer will assess the quantum of such costs that are to be removed from the total costs incurred till then. He may apportion such costs in proportion to the quantity billed or compute these through any other rational means. The amounts thus removed from the costs will be carried over as ‘deferred expenses’ and are to be included in ‘estimates to complete’.

Similarly, care should be taken to include accrued expenses (provision for expenses) into the above cost. Accrued expenses are those expenses for which works were already carried out but payment not yet made. Thus,

job status to date cost = actual cost incurred − deferred expenses + accrued expenses                    (12.1)

Site accountant will keep track of all transactions that are likely to take place outside his site, concerning his project, and maintain a register of such items for preparation of the cost statement. In case of delay in receipt of debit advices for such items, he should estimate the cost based on reasonable assumptions. Since all transactions take place as a result of actions taken by the site or actions known to have been taken on behalf of the site, sufficient information would be available for the site accountant to compute such costs.

12.2.3 Plant and Equipment Cost

The components of plant and equipment cost include hire charges, labour, fuel and oil, spares, running and maintenance cost, one-time installation and erection cost, and dismantling cost. While some of the plants and equipments can be owned by the company directly, other plants may be rented from agencies. Even when some plants are owned by the company, they have a practice of debiting hire charges as if these were taken from outside agencies. This is done to know the exact usage cost of plant and equipment in a particular work cost head. Generally, for each of the plant and equipment, the companies maintain an asset code. Plant and equipment cost statement (contains hire charges + operating costs) is prepared for each of these asset codes being utilized at project site. From the log book of each of these plant and equipment assets, the cost is ploughed back to the relevant cost codes of activities for which these assets have been utilized. The operator costs are collected from the labour cost details discussed earlier. Expenses towards fuel, oil and spares are collected from the details available through stores department.

12.2.4 Subcontractor Cost

The source document for calculating subcontractor cost on a project is work order issued to the subcontractor by the main contractor and the periodic measurement bills. Relevant cost codes should be mentioned against each item of work in a subcontractor bill.

The subcontractor labour cost is recorded from relevant cost codes for which the particular subcontractor is engaged, through the subcontractor bill for the month. One can also mention the cost code for the subcontractor labour in the work order or the measurement sheet. Issues of materials to the subcontractor by the main contractor are done on a chargeable basis and are normally compiled under a separate cost code. Recovery from subcontractor’s bill is made at predetermined intervals and is appropriately considered in the costing.

12.2.5 Overhead Cost

The overhead cost can be directly taken from the ledgers and grouped under fewer cost codes, averting costing of individual vouchers at sites. Once the basic elements of cost are collected for the period, some of the costs can be reallocated to work items and overheads, if necessary. Also, the general overheads need to be allocated to all projects being undertaken by the company in proportion to the contract value of the project. The expenses related to staff that can be directly identified to ‘specific projects’ shall be taken to the respective jobs. The common staff expenses and other administration expenses are allocated to all the projects being undertaken by the contracting organization in proportion to the invoicing of each of the projects.

It can be observed from the above discussion that cost collection for a large project is a big exercise that involves a number of people such as planning engineer, billing engineer, plant and equipment staff, storekeeper and accountants. Planning engineer is supposed to coordinate the process. It is expected that all the involved people do their part in time so that project cost is compiled at regular intervals and made use of in an effective manner.

12.3 COST CODES

These codes are designed based on the nature of the activity for which a particular cost is incurred. Cost codes are allocated by the planning department depending on the nature of activity at site. The cost codes should be such that these are easily compatible with the bill of quantity. The number of cost codes should be neither too large nor too small.

The basic point is that all the expenses incurred in and for the project should be recorded in one of the cost codes, no matter how small or how large the number of cost codes for a project. Some companies maintain additional cost codes for staging and shuttering, temporary structures, operating cost of plant and equipment, and installation cost of batching plants and quarry.

While on the subject of cost code, another point that merits attention is the comparison of cost with some standard such as accepted cost estimate. Harris and McCaffer (2005) suggest adoption of coarse-grained system that describes no more than 15 cost codes. They quote the study by Fine which finds the following interesting results.

If there are 30 cost heads in a project, about 2 per cent items are misallocated, while for a project with 200 cost heads about 50 per cent items are misallocated, and for a project with 2,000 cost heads, about 2 per cent of items are correctly allocated.

The activity codes are widely circulated to the authorized project staff so that correct allocation of costs to different cost heads is achieved. These allocations are further checked centrally by the project-planning engineer on a daily basis.

12.4 COST STATEMENT

Costing is a method of collecting expenses at the job site under various heads of accounts called cost codes. The cost codes are to be finalized at the beginning of the job and communicated to all section heads at the job site and all staff who are empowered to authorize the indents.

In preparing the cost statement, the following system has to be adopted:

  1. Allot cost codes: This has already been discussed
  2. Collect (a) labour costs, (b) subcontractor costs, (c) materials cost, (d) consumables, (e) plant costs, and (f) overheads cost. The method of collecting the costs and the documents through which these are collected have already been explained
  3. Determine provision for expenses
  4. Determine deferred expenses
  5. Compile above costs in the given formats, finalize total costs code-wise, and arrive at project costs

The cost statement will reflect both the cost during the month and the cumulative costs for the job. The application of cost statement is in the preparation of project cost report, which has been discussed later. Typical formats of cost statements are given in Figure 12.4 to Figure 12.7.

The source of plant and equipment charges is the plant and equipment department. Time office and stores maintain the records of labour cost and material cost, respectively, while the voucher payment is used to know the other expenses concerning a particular plant and equipment.

Figure 12.4 Cost statement of plant and equipment for a given month

Figure 12.5 Cost statement—without plant cost allocation

Figure 12.6 Integrated cost statement

Figure 12.7 Cost statement summary

12.5 VALUE MANAGEMENT IN CONSTRUCTION

The concept of value management (VM), also known as value analysis (VA) or value engineering (VE), evolved during World War II. It is a systematic approach for obtaining value for the money spent. VE is one of the most effective techniques known to identify and eliminate unnecessary costs in product design, testing, manufacturing, construction, operations and maintenance. VE involves answering the question—‘What else will accomplish the function of a system, process, product, or component at a reduced cost?’ (Dell’Isola 1982)

The core of value management lies in the analysis of function and is concerned with the elimination or modification of anything that adds cost to an item without adding to its function. In value engineering, ‘function’ is that which makes the product work or sell, and accordingly, we have ‘work’ functions and ‘sell’ functions. All functions can be divided into two levels of importance—basic and secondary. The basic function is the primary function of a product or a service, while the secondary functions are not directly accomplishing the primary purpose but play a supporting role and provide additional benefits.

Some other related terms used in value engineering are worth, cost and value. Worth refers to the least cost required to provide the functions that are required by the user of the finished project. Worth is established by comparison, such as comparing it with the cost of its functional equivalent. Cost is the total amount of money required to obtain and use the functions that have been specified. Value is the relationship of worth to cost as realized by the owner, based on his needs and resources in any given situation. The ratio of worth to cost is the principal measure of value.

Thus, value may be increased by—(1) improving the utility with no change in cost, (2) retaining the same utility for less cost, and (3) combining improved utility with less cost. The situation in which worth and cost are equal represents ‘fairness of deal’, while the situation in which worth of a project is more than the cost paid represents a situation of ‘good bargain’. The situation in which worth is less than the cost paid for a project represents ‘poor value’. An optimum value is obtained when all utility criteria are met at the lowest overall cost.

Value engineering can be applied to any phase of a construction project, though the best results may be expected during the initial stage of a project. VE has its best chance for success in the integrated design–build organization. Beginning at the pre-design stages, when the potential for value engineering is the highest, the owner meets his entire integrated project team and provides inputs. As the integrated team begins work, multiple facets of value delivery are hypothesised, tested and enacted continuously. Team members across different functional lines consider the project in a holistic sense.

When applying value engineering, all expenditures relating to construction, maintenance, replacement, etc., are considered and through the use of creative techniques and the latest technical information regarding new materials and methods, alternate solutions are developed for the specific functions. It is claimed that application of value engineering can result in a saving of about 15 per cent–20 per cent of the construction costs.

Construction is one among many types of project-based production systems—shipbuilding, movie-making, software engineering, product development and all forms of work-order system. The aim is to provide the required functions to the user and ensure that anything else is eliminated, thereby reducing unnecessary costs. So, the moot question is—how are value engineering (VE) principles relevant to the construction industry?

VE principles are dovetailed with the construction type of temporary production system where production starts only after the user defines its needs specifically, as part of the exercise of eliminating wastages. As such, each activity of production is targeted towards fulfilling user requirements. Such is not the case with the manufacturing or product development industry, where in many cases a product’s required function is decided by the producer and not by the user, whether it is the case of mobiles, laptops, automobiles, or a number of other products where the customer has to pay for many additional features which may not be user-specific and may even be undesirable to him. In the manufacturing industry, the scope for modification or elimination of the undesirable features of a product to a particular customer is limited, while the construction industry offers unlimited scope for alterations specific to the user.

It is an irony that construction projects, whether big, small, or of national importance, get delayed or often have long gestation in many countries. Also, there are large variations in the final cost of constructed facilities and the originally proposed cost of the projects. The delays and the cost overrun could be due to many reasons, but ultimately these lead to decline in the value to a great extent. There is, therefore, a need to move from the traditional method of construction to alternative approaches that can deliver fast-track constructions. The ‘design and build’ approach is an alternative. It may be noted that the last few years have witnessed a growing trend in the adoption of ‘design and build’ construction contracts.

In the ‘design and build’ approach, a particular entity forges a single contract with the owner to provide for architectural/engineering design services and construction. Here, the designer works directly under the project manager, unlike in the traditional design–bid–build projects where a designer works under the owner and there is no contact between the project manager and the designer. The ‘design and build’ approach has been found to be extremely beneficial when applied to fast-track projects in different countries. Fast-track construction is generally based on the norms for the industrial plant structures where the design and the construction work can go on simultaneously leading to reduction in the project-cycle time. Further, single-point responsibility eliminates the scope for blaming others for delay, cost overrun, value loss, etc. The integrated design–build team focuses not on getting money out of the project, but on putting value into the project for the duration of the facility’s useful life.

In the subsequent sections, we discuss the applicability of value engineering at different stages of a design–build project through a real-world case study. For this, first we discuss the different steps in the application of value engineering.

12.6 STEPS IN THE APPLICATION OF VALUE ENGINEERING

As mentioned earlier, the different steps described here are for the application of VE in design-and-build projects. With few modifications, however, the steps can be applied to different types of construction projects. The schematic representations of these steps are given in Figure 12.8.

  1. Within the scope of design-and-build industrial projects, different plant and non-plant structures are compared with respect to their cost. Normally, only a few structures would be responsible for a very high cost. Accordingly, only these structures merit attention and application of VE, subject to the constraints of time and resources.
  2. Further, within a given structure, various elements such as foundation and superstructure construction, and material aspects are analysed cost-wise. Here also, only the elements with high cost implications are explored and analysed from the viewpoint of VE.
  3. The above step is followed by the construction of a FAST1 diagram, which assists in breaking up a large problem and helps us to orderly identify the basic and secondary functions of the element under consideration. The ‘why’ and ‘how’ questions are closely linked to each other logically.
  4. All the possible alternatives/ideas are then generated to cater to the functions as identified in the previous step, through a brainstorming session. Let us assume that for some element the alternatives generated are identified as x1, x2, x3, x4 and x5.

    Figure 12.8 Schematic diagram depicting different steps in the application of VE in design-and-build project

  5. The identified alternatives/ideas are then evaluated in two stages. The first stage comprises a rough screening process. This is done by enumerating advantages and disadvantages associated with each of the alternatives. These are ranked based on the subjective assessment of the evaluators. The evaluation is done not merely by counting the number of advantages or disadvantages, but also by taking into account the strength or importance of a particular advantage or disadvantage associated with a particular alternative. Some of the seemingly unattractive alternatives are dropped here itself and removed from the subsequent analysis. The ideas retained at this stage are taken to the next stage. For example, let us assume that out of the five alternatives x1 to x5 generated earlier, two alternatives x1 and x2 are rejected at this stage. In that case, the alternatives x3, x4 and x5 only will be taken in the next step of analysis.
  6. Now, in order to select the best alternative/idea from the remaining ones (x3, x4 and x5), performance criteria are identified through literature review or interaction with experts. In this study, the identification and preference of each of the performance criteria was carried out using a questionnaire survey. For each of the performance criteria, respondents were asked to give a rating on a five-point scale in which ‘5’ represented ‘extremely important’, ‘4’ represented ‘major important’, and ‘3’, ‘2’ and ‘1’ represented ‘important’, ‘minor important’ and ‘slightly important’, respectively. The performance criteria were then ranked based on the mean values of the responses. The criterion with the highest mean value was rated as the first rank and the criterion with the lowest mean value was rated as the last. Intermediate values were assigned depending on the mean values of the responses.
  7. Evaluation matrix was then used for obtaining the weights of each performance criterion. Each criterion was assigned a letter of the alphabet and then compared with the other criteria based on the preference of the owner/designer for each particular project. The importance of one criterion in relation to another can be measured in terms of a four-point scale in which ‘4’ represents ‘major preference’, ‘3’ represents ‘medium preference’, ‘2’ represents ‘minor preference’, and ‘1’ represents ‘slight preference’. After all the comparative evaluations are made, the raw scores of each criterion are totalled by summing up the assigned letters in the matrix. After this, the raw scores are adjusted to a scale of 1–10, wherein 10 is assigned to the criterion with the highest raw score and the other criteria are adjusted accordingly, which finally gives us the weights of the criteria (Hammond and Hassanani 1996).
  8. Then, the alternatives x3, x4 and x5 are evaluated against each of the performance criteria. It is assumed that all the alternatives that have survived meet the minimal needs or basic functions of the owner or the user. The scoring system used for this purpose is a five-point scale in which the extremes ‘1’ and ‘5’ represent ‘poor’ and ‘excellent’, respectively. The ranks were given by experts for each of the alternatives x3, x4 and x5 for their corresponding performance criterion.
  9. The ranks of each alternative are multiplied by the corresponding weights of the criteria, and thereby the resulting scores are calculated. The total scores are thus known, through summation of the resulting scores, for each alternative.
  10. The alternative with the highest score is thus selected to cater to the desired function. The same process is adopted for all the elements in a particular structure.

The application of the above methodology is illustrated through a live case study discussed in the subsequent section.

12.7 DESCRIPTION OF THE CASE

The real-world design-and-build construction project that we have chosen for our case study is an industrial building of a reputed glass manufacturer (the client). A leading Indian construction company was awarded the contract for civil and structural work for integrating float-glass plant as a design-and-build lump-sum contract. The project is located in the northern parts of India. The initial contract value of the design and construction project was Rs. 92 crore. This industrial project was chosen as our case project since its construction was focused mainly on satisfying the functional requirements, while the aesthetic requirements were not given much attention except in the case of a few buildings in the plant such as administrative building. Hence, VE becomes a potent tool for realizing maximum benefits.

The scope of work for the glass plant consisted of formulating the architectural/structural/services designs and preparation of working drawings, preparation of the required plans/drawings for approval from the necessary and appointed authorities, and execution of the works in accordance with the drawings and contractual specifications.

The glass plant under construction consisted of more than thirty plant and non-plant structures. Some of the major structures in the project were batch plant, furnace, float bath, annealing lehr, cold end and warehouse. Based on the Pareto Law, it has often been noticed that only about 20 per cent of the items constitutes nearly 80 per cent of the cost. This was found to be true for this plant as well. Only five structures—namely, warehouse, annealing lehr, float bath, furnace and main office building—constituted about 76 per cent of the total cost (see Figure 12.9). As suggested in VE, the main focus should be restricted to the structures having higher saving potential. Further, out of the five structures mentioned, in-depth VE analysis was done only for the warehouse, mainly due to constraints of time and human resources. The cost break-up for the civil items showed that the items contributing to most of the total cost were pile foundation, flooring, granular sub-base (GSB), fabrication and fit-up structural steel (refer to Figure 12.10).

Figure 12.9 Break-up of cost of different structures for the case project

Figure 12.10 Break-up of cost of different items/elements in warehouse structure

As seen from the cost break-up of the warehouse (Figure 12.10), the cost of the foundation forms a major part of its total cost. It is taken up first for the VE study as it has the maximum saving potential.

12.8 VALUE-ENGINEERING APPLICATION IN THE CASE PROJECT

As mentioned, the cost of foundation was a major element in the case project. Accordingly, this has been taken up for VE application. Besides, VE has been considered on flooring system, superstructure construction, material selection for sub-base, etc.

12.8.1 Foundation Design

In the case project, the soil stratum at the warehouse site had a low bearing capacity such that the spread foundations were found to be infeasible and uneconomical, which, in turn, necessitated the deep foundation such as piles. The bearing capacity of the soil as obtained from the plate-load test was 8 t/m2. The groundwater table was at an average depth of 2.5 m. In the warehouse alone, there were, in all, 134 pile caps resting over two piles running 22 m deep on an average.

A FAST diagram was drawn in order to identify the basic and secondary functions (see Figure 12.11). Some of the functions of the foundations identified are—transfer load, compact soil, resist settlement, and avoid liquefaction. The functions thus identified helped in thinking up new alternative ideas. The alternative solutions for the foundation of warehouse are:

  1. Strap footings
  2. Concrete piers—a pair of columns (each of size 400 mm × 500 mm) carrying a load of 600 kN each, resting on a pile cap of dimension 2.5 m × 1.5 m supported by two piles running 22 m deep
  3. Deep vibratory compaction (Baker, undated)
  4. Vibrated stone columns (Farel and Taylor 2004)
  5. Rammed aggregate piers (RAP) as per the details given in Majchrzak et al. (2004)

Figure 12.11 FAST diagram for warehouse foundation

To explain the last mentioned in detail, reinforce the soil with four rammed aggregate piers 10 m deep of 750 mm diameter, with total area equal to 30 per cent of the footing area. Crushed aggregates of 20 mm–37.5 mm are used for the RAP. Conventional isolated footing is designed on top of RAP. Aggregates are rammed using 10 kN–20 kN hydraulic hammers. From the design calculations for RAP, it is found that four RAPs of 750 mm diameter and 10 m depth increase the bearing capacity of the soil from 70 kN/m2 to 250 kN/m2, and are sufficient to substitute 22 m deep pile foundation. The settlement as found from the previous case studies is within 8 mm–20 mm, which is less than the permissible settlement of 50 mm for the warehouse. The productivity of piles and RAPs per foundation is the same for the pile driving and RAP installation equipment, respectively, and so, the time to construct will be almost the same.

The advantages and disadvantages corresponding to each of the above alternatives for the foundation are enumerated in Table 12.1. The top three alternatives—namely, vibrated stone column (rank 1), rammed aggregate piers (rank 2), and deep vibratory compaction method (rank 3)—were selected for further analysis.

In order to arrive at the best alternatives, nine performance criteria for evaluating the alternatives were identified with the help of experts. In order to know the preferences for these nine criteria, a questionnaire survey was undertaken in which the respondents were asked to evaluate the criteria on a five-point scale. The responses obtained from the 20 respondents are shown in Table 12.2.

The mean value of each criterion and the corresponding rank are shown in Table 12.3. For illustration, let us take cost as the criterion. Twelve respondents have rated it as ‘extremely important’, five have rated as ‘major important’ and three respondents have rated it as ‘important’. Thus, the mean value for ‘cost’ criterion works out to be (12 × 5 + 5 × 4 + 3 × 3) ÷ 20 = 4.45. In a similar manner the mean values of other criteria have been worked out. The criterion with the maximum mean value (incidentally, it is for the cost criterion) is ranked one and so on.

Furthermore, a pair-wise comparison, i.e., matrix evaluation, is done to get the weight of each performance criterion. This is shown in Table 12.4. For pair-wise comparison, one criterion is taken at a time and is compared with the remaining criteria on a four-point scale, as mentioned earlier. For illustration, let us take the entry A-2 in row 1 and column 1 of Table 12.4. Here, the entry A-2 means that the criterion A has minor preference over criterion B. The other entries in the table can be similarly interpreted. Then, the raw scores of each criterion are totalled. For example, the raw score of criterion A works out to be 20 (2 + 3 + 1 + 2 + 3 + 4 + 4 + 1). Similarly, these scores are calculated for all the criteria. The raw scores are finally adjusted to a scale of 1–10, with 10 being assigned to the criterion with the highest raw score. The other criteria are adjusted accordingly. The assigned score for each criterion is shown in Table 12.5, which also shows the ranks assigned by the experts on a five-point scale for each criterion for the three alternatives, viz. deep vibratory compaction, vibrated stone column and rammed aggregate piers. For example, in respect of the cost criterion, the experts have given a rating of 4, 4 and 3, respectively, to the three alternatives. Similarly, for the soil compaction criterion, the experts have assigned the ratings 3, 4 and 3, respectively, to the three alternatives.

 

Table 12.1 Comparison of qualitative features of various alternatives

The ratings given by the experts for each criterion corresponding to an alternative are multiplied by the weight of the criterion obtained earlier to get the score. The individual scores of each criterion are added to get the total score of a particular alternative. It is observed that the total scores obtained for the three alternatives are 92.0, 130.0 and 138.0 respectively.

 

Table 12.2 Evaluation of criteria governing foundation selection

Table 12.3 Evaluation criteria and their relative weights

Hence, it can be concluded that under the given circumstances, the alternative of providing rammed aggregate piers will give the best result. Without going through the VE process, the actual alternative selected was the arrangement of pile and pile caps for the foundation. It would be interesting to see the difference in costs of the actually implemented alternative and the best possible alternative as suggested by the VE process.

The original design consisting of a pair of piles and pile caps supporting the columns costs Rs. 103,420, whereas the cost of proposed isolated footings with RAP is Rs. 49,866, which is less than half the cost of the original design. The figure of Rs. 49,866 has been arrived at by adding the cost of RAP (which includes the excavation, the cost of aggregates, and the owning and operating cost of equipments for RAP) and the cost of constructing spread footing (which includes the cost of excavation and the cost of reinforced cement concrete including formwork). The total saving with the proposed modification, thus, works out to be Rs. 7,176,236 for the warehouse structure alone.

12.8.2 Flooring System

The flooring for the warehouse consists of grade slab, which is designed for the load of 60 kN/m2. The presence of high groundwater table at an average depth of about 2.5 m may result in building up of upward water thrust on the grade slab. The total plinth area of the warehouse was 25,950 m2 (with length = 250.00 m and breadth = 103.80 m).

As per the specification of the existing design, the layer below the flooring consisted of granular sub-base (GSB) of compacted thickness of 225 mm in single layer, with specified graded stone metal as per the relevant Indian Standards specification, including conveying of material to the site and spreading in uniform layers on prepared surface, watering and compacting with vibratory roller having minimum 80 kN–100 kN static weight and at OMC (Optimum Moisture Content) to achieve desired density including all material, labour, machinery with all lead, lifts, etc. With an area of 25,950 m2 and allowing for some deductions, the total quantity of the sub-base material was found to be 5,618.31 m3.

 

Table 12.4 Pair-wise comparison matrix for performance criteria evaluation

Table 12.5 Analysis matrix

The main function of GSB provided under grade slab is to transfer load from the grade slab to the soil beneath, and at the same time provide for dissipation of upward water thrust due to the presence of high water table. Suitable drainage system consisting of perforated pipes is provided for this purpose (Arm 2003). At the same time, the GSB material should have sufficient strength so that it does not get crushed during compaction, as the finer crushed particles will try to clog the air voids and help in building the water pressure.

Applying the same methodology as adopted for the foundation system, the functional evaluation for the GSB has been done and various alternatives have been proposed:

  1. MSWI bottom ash (Maria 2001)
  2. Recycled concrete (Prasad 2001)
  3. Air-cooled blast furnace slag (AcBFS)
  4. Coal fly-ash stabilized bases (Mudge 1971)
  5. Quarry waste

As already discussed, the advantages and disadvantages corresponding to each of the five alternatives were listed out for preliminary screening process. These are provided in Table 12.6 and are self-explanatory.

After the preliminary screening, the alternatives ‘coal fly-ash stabilized bases’ and ‘quarry base’ were dropped and the remaining three alternatives were taken up for subsequent analysis. These chosen alternatives were evaluated using the same procedure as described for the foundation system. The matrix evaluation and the relative weights obtained for the performance criteria are presented in Tables 12.7 and 12.8, respectively.

It can be observed from the tables that the maximum raw score has been obtained for the ‘availability’ criterion, and accordingly, it has been assigned a weight of 10. Other criteria have also been assigned weights in a similar proportion. The information on the assigned weight and the rank of each criterion for each alternative is provided in Table 12.9, and on this basis the total score for each alternative is calculated. According to the results obtained from the analysis matrix, the most viable substitute for sub-base material is found to be AcBFS with a total score 193.2, followed by the recycled crushed aggregates with a score of 158.2, and MSWI bottom ash with the least score of 126.7. AcBFS has been used at some places on an experimental basis and has shown very good performance. AcBFS and clean crushed concrete could be used as embankment fill, as a capping layer and as a sub-base. Their properties are best utilized in a sub-base.

 

Table 12.6 Comparison of qualitative features of various alternatives for sub-base

Comparative cost calculation for the originally designed material and the proposed material has been made and summarized in the results. The original design consisting of GSB costs Rs. 150/m2 (this is the sum of Rs 110/m2 cost of material and Rs. 40/m2 for cost of labour and plant and machinery). The cost of suggested material AcBFS works out to be Rs. 96/m2 (Rs 56/m2 for material cost and Rs. 40/m2 towards labour and plant and machinery). The cost saving in this item for the warehouse alone works out to be Rs. 1,349, 340.

 

Table 12.7 Pair-wise comparison of performance evaluation criteria

12.8.3 Precast vs in-situ Construction

Warehouse is a cast-in-situ RCC framed structure with a number of columns and tie beams at different levels. The roof is covered with sheeting material supported on steel trusses. Considering the intended functions of the complete warehouse itself, the possible alternatives were generated. Some of the alternatives satisfying the functional requirements have been proposed and they are analysed. Although there could be a large number of possible alternatives such as pre-cast construction, construction using structural steel, etc., this study compared the original alternative with the pre-cast construction alternative. Here also, the analysis focused only on replacing a few cast-in-situ members with pre-cast construction. The structural elements that have been analysed in the study are gantry beams, tie beams, rib slabs and roof truss sheathing beams. The basic assumptions made for cost comparison between cast-in-situ and pre-cast construction take into account the saving in construction cost as well as the saving in construction time. The saving potential of pre-cast construction is estimated for the pre-cast gantry girder, the truss sheathing beam, the tie beam (+3.25 m), and the tie beam at truss level in 174, 83, 48 and 83 elements, respectively. The cost comparison for these elements for both the alternatives show that there is a saving potential of Rs. 247,828 if the mentioned cast-in-situ elements are replaced with the pre-cast elements. Although the amount is not significant, the time saved in using pre-cast construction would be of interest. It was found that replacing the cast-in-situ elements with pre-cast construction could save about 49 days of construction time, considering a cycle time of 21 days for the cast-in-situ gantry girder and 14 days for the cast-in-situ tie beams and truss sheathing beam. The time saving has been converted into monetary value and it works out to be Rs. 1,025,000 from the expression used by Warszawski (2000). The total saving, thus, works out to be Rs. 1,272,828 for the elements under consideration in the warehouse structure alone.

 

Table 12.8 Evaluation criteria and their relative weights

Table 12.9 Analysis matrix for material selection

12.8.4 Discussion of Results

Value engineering study for the foundation implies that various alternatives available for the design of the system need to be explored at the time of design itself, and designers should not try to optimise their own productivity without considering the cost implications of their design, since in many cases design flaws contribute to about 50 per cent of the value loss. In our study, it has been found that poor selection of the foundation system has resulted in a loss of value to a similar extent. The foundation unit that could have been constructed at Rs. 49,866 without compromising on the intended function has been performed at a cost of Rs. 103,420. According to our findings, the pile foundation gave a poor value of 0.48 (49,866 ÷ 103,420) for RAPs.

It has been observed in many cases that contractors have better knowledge regarding the availability and cost of local materials, as compared to the designer, and are in a better position to provide feedback to the design team about the possible alternatives. The applicability for the intended function can be verified by the designers. In this respect, design-and-build projects offer an ideal opportunity. However, as has been found in this study, lack of VE application has resulted into loss in value to the tune of Rs. 1,349,340 in just one item of one structure.

Although the cost comparison of cast-in-situ and pre-cast construction has resulted in a marginal saving in construction cost, the possible saving in time has been neglected due to lack of VE application during design stage, thereby resulting in a considerable loss in value.

While VE application can be done in all the phases of a project, in the case study we have illustrated its applicability primarily in the design stage. Also, it should be noted that the cost-saving potential diminishes as time progresses from commencement to completion. Therefore, it is desirable to apply it as early as possible in a project. Looking at the increasing trend of adoption of design-and-build projects vis-à-vis traditional projects, it is further desirable to apply VE techniques for avoiding loss of value to the different stakeholders of a project.

REFERENCES

 

1. Arm, M., 2003, ‘Mechanical Properties of Residues as Unbound Road Materials’, PhD thesis, Stockholm, Sweden.

2. Baker, Hayward, Undated, Vibro System, available at. http://www.HaywardBaker.com.

3. Dell’Isola, A.J., 1982, Value Engineering in the Construction Industry, 3rd edition, New York: Van Nostrand Reinhold.

4. Farell, T. and Taylor, A., 2004, ‘Rammed Aggregate Pier Design and Construction in California—Performance, Constructability and Economics’, SEAOC Convention Proceedings.

5. Hammad, A.A. and Hassanain, M.A., 1996, ‘Value Engineering in the Assessment of Exterior Building Wall System’, Journal of Architectural Engineering, September, p. 115.

6. Kaufman, J.J., 1990, Value Engineering for the Practitioner, 3rd edition, North Carolina State University, Raleigh, N.C.

7. Majchrzak, M., Lew, M., Sorensen, K. and Farrell, T., 2004, ‘Settlement of Shallow Foundations Constructed over Reinforced Soil: Design Estimates vs Measurements’, Proceedings of the Fifth International Conference on Case Histories in Geotechnical Engineering, Paper No. 1.64, New York, April 13–17.

8. Maria, I., Enric, V., Xavier, Q., Marilda, B., Angel, L. and Feliciano, P., 2001, ‘Use of Bottom Ash from Municipal Solid Waste Incinerator as a Road Material’, Paper No. 37, In International Ash Utilization Symposium, Centre for Applied Energy and Research, University of Kentucky.

9. Mudge, A.E., 1971, Value Engineering: A Systematic Approach, New York: McGraw-Hill.

10. Prasad, M.M., 2001, Utilization of Industrial Waste Byproduct in Road Construction, IRC (19) 94.

11. Parker, D.E., 1985, Value Engineering Theory, The Lawerence D. Miler Value Foundation, Washington, D.C.

12. Warszawski, A., 2000, Industrial and Robotics in Building, New York: Harper & Row Publishers.

REVIEW QUESTIONS
  1. State whether True or False:
    1. Four broad steps involved in project cost management are—resource planning schedule, cost planning, cost budgeting and cost control.
    2. The cost of an activity is collected under these broad heads—labour costs, material costs, plant and equipment costs, subcontractor costs, consumable costs, and overheads.
    3. Cost planning aims at ascertaining cost before many of the decisions are made related to design of a facility.
    4. Cost budgeting is the process of allocating the overall cost estimate to individual work items of the project.
    5. The objective of cost control is to ensure that the final cost of the project does not exceed the budgeted or planned cost.
    6. Labour cost accounting is done under heads of departmental labour and subcontractor labour.
    7. The two types of materials used in construction project are client-supplied and owner-purchased.
    8. The job status to date cost is given by actual cost incurred—deferred expenses and accrued expenses.
    9. Plant and equipment cost = hire charges + operating cost.
  2. What are the different steps taken for project cost management? Discuss in brief.
  3. What do you mean by project overheads?
  4. What are the critical aspects that should be considered as vital while cost planning?
  5. Differentiate between cost budgeting and cost planning?
  6. Discuss in brief three steps involved in cost control and why cost control is important?
  7. Why is the cost code important?
  8. How is the cost statement prepared? Discuss its importance in brief.
  9. Visit a construction site and collect the cost information on various cost heads as given in the text.
  10. Study cost statement of any significant project being executed around you.
  11. What is value engineering? In what stage of the project value engineering can provide maximum advantages?
  12. Discuss the various steps involved in the application of value engineering.
  13. Draw FAST diagram for (a) plastering of wall, (b) flooring, (c) roof slab construction.
  14. Clearly explain (a) worth, (b) cost, and (c) value.
  15. Apply the value engineering in the context of (a) road construction project, and (b) building project.