Value Engineering Applications in Transportation (2005)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

BRIEF HISTORY OF VALUE ENGINEERING VM emerged in the United States during the 1940s, at a time when challenging decisions had to be made regarding the alternative design choices needed to overcome a general shortage of resources. General Electric’s Vice President of Purchasing, Harry Erlicher, observed that design changes and material substitutions often resulted in a better product at a lower cost. He was interested in discovering why this unexpected result had occurred and this set in motion the actions that would eventually yield VM (2). Erlicher requested that Lawrence D. Miles, Manager of Purchasing, develop effective ways to improve value. This program, termed value analysis (VA), was established in December 1947. Miles realized that the functions performed by a product held the key to improved value. In addition, he recognized that the VM was unique—not part of the conven- tional design process routine. However, sustaining the method- ology required a champion and converts. Miles obviously filled the role of the champion. General Electric embarked on an extensive training program in October 1952 in response to the early success it had with the VA program (2). VM has, on occasion, been inappropriately viewed as cost cutting. This likely stemmed from poor or misguided efforts to lower product or project costs without truly understanding how it should perform. However, it is clear that from the start, VM targeted improvement. At the first VA training ses- sion in October 1952, E.E. Parker established the ground rules in his opening presentation, indicating that “our creed is the same performance for lower cost.” Although the value and design teams ultimately have the same objective, the most cost-effective and appropriate product or project, the approaches taken are different. However, even at this early stage Miles cautioned that “there is no competition between us (value and design teams). Let’s never let that thought pre- vent our cooperation” (4). General Electric’s VA program was immensely success- ful and remained as a competitive advantage for almost a decade. In 1954, the Department of Defense’s Bureau of Ships became the first U.S. government agency to embrace VM in its procurement activities. The Bureau of Ships named its program value engineering (2). 8 FEDERAL INITIATIVES The use of VE spread through the U.S. government in the early 1960s. Navy Facilities Engineering adopted VE in 1963, and by 1965 VE incentive provisions were being introduced into construction contracts. This widespread interest in VE was premised on the belief that VE could improve the cost- effectiveness of publicly funded projects (5). Congress became interested in applying VE to highway projects in the late 1960s, at a time when the highway net- work was being significantly expanded. The Federal-Aid Highway Act of 1970 reflected this growing interest with a provision requiring that VE and other cost-reduction analy- ses be performed on any federal-aid highway project or any federal-aid system. In 1973, FHWA appointed a staff posi- tion to coordinate its VE program and training requirements. The training program commenced in 1975, and by 1999 8,500 people had been trained. The FHWA program was structured to encourage rather than mandate the application of VE at the state level. AASHTO formally recognized VE in 1985 and issued the first edition of the AASHTO Guidelines on Value Engineer- ing in 1987 (6). Both FHWA and AASHTO worked cooper- atively to assist the STAs with their VE studies. This assis- tance included staff training, study team participation, and program performance activities. Borkenhagan’s article in Public Roads, “Value Engineer- ing: An Incredible Return on Investment” (5), reported that an average of 324 VE studies per year were completed between 1993 and 1997. However, the majority of these stud- ies were undertaken by a relatively small number of STAs, with 11 states combining to complete 79% of the reported studies. Although many publicly funded projects had been improved in terms of avoided expenditures, it became clear that the “encourage VE” approach taken by FHWA had not fully engaged the majority of STAs across the country. The 1991 Intermodal Surface Transportation Efficiency Act (ISTEA) provided FHWA with the opportunity to revisit its VE mandate. Although the then current approach was considered to be successful, FHWA sought to increase the level of VE activity on federally funded highway projects. Key to increasing VE activity was the need to understand CHAPTER TWO VALUE ENGINEERING IN TRANSPORTATION

9how the STAs viewed their individual VE programs. For example, Borkenhagan noted that agencies adopted VE to • Save money and ensure cost-effectiveness, • Improve quality, • Eliminate unnecessary design elements, and • Foster innovation and improve productivity. Agencies that had not achieved success with VE often cited a lack of resources (staff and time) to complete the VE study. Some STAs noted that VE appeared to duplicate exist- ing programs such as in-house engineering reviews. A key aspect of success appears to be the level of buy-in at the man- agement level. In 1991, an audit of federal VE practices by the President’s Council on Integrity and Efficiency concluded that more could and should be done by federal agencies to realize the benefits of VE. Principal direction was issued by the Office of Management and Budget (OMB). OMB Circular A-131, updated in May 1993 (7), requires all federal departments and agencies to use VE, where appropriate, to reduce program and acquisition costs. Circular A-131 also stipulated that each department or agency be required, as a minimum, to • Designate a senior management official to monitor and coordinate the VE activities, • Develop criteria and guidelines to identify programs and/or projects with the most potential to yield savings when VE is applied, • Assign responsibility to a senior management official to grant VE study requirement waivers for certain pro- grams and/or projects, • Provide VE training to staff involved in VE, • Ensure that VE funding requirements are included in the annual OMB budget request, • Maintain documentation records pertinent to the VE program, • Adhere to applicable federal acquisition requirements, • Develop an annual VE program plan, and • Report VE activities to OMB on an annual basis if the annual total agency budget exceeds $10 million. OMB Circular A-131 is included in Appendix A. In November 1995, the U.S. Congress enacted the National Highway Designation Act. This legislation instructed the Sec- retary of Transportation to establish a program requiring that STAs conduct VE analyses on all NHS projects with a cost of $25 million or more. The act provided additional flexibil- ity at the state level in terms of how and when VE studies would be performed and by whom. Team composition restric- tions (i.e., VE team members must be completely indepen- dent of the design process) and funding controls were also introduced. FHWA issued its VE Regulation 23 CFR Parts 627 in February 1997 (8). The regulation requires that each STA establish a VE program for NHS projects with total projected costs of more than $25 million. Each program will focus on: • Improving project quality, • Reducing project costs, • Fostering innovation, • Eliminating unnecessary and costly design elements, • Ensuring efficient investment in NHS projects, and • Develop implementation procedures. A companion FHWA VE Policy was issued in September 1998 (9) to provide policy guidance for VE studies under- taken on federal-aid projects. The FHWA VE Regulation and Policy are included in Appendix A. A design–build (D/B) contracting regulation was reviewed in 2002. A Notice of Proposed Rulemaking was extensively discussed in late 2002 (10). The Federal Register presented the final ruling that VE would be required on all NHS D/B contracts before the release of the D/B request for proposals (RFP). The ruling also notes that a pre-RFP VE study would not preclude future additional VE studies on the NHS project. The AASHTO VE Technical Committee (formerly Task Force) was established to assist the STAs through positive promotion and distribution of VE knowledge. The VE Tech- nical Committee’s charge statement defines its function and responsibilities. To establish and maintain policy to assist states in the develop- ment of individual Value Engineering Programs, ensure integrity and uniformity of VE practices, and promote VE within all areas of state and federal transportation programs. Plan and deliver a biennial transportation value engineering conference. The VE Technical Committee developed the following 2002–2012 work plan: • Plan, develop, and deliver a national VE conference every other year to assist states in developing, main- taining, and improving VE programs. • Deliver a national conference on the odd years: – Hold a planning meeting for the national conference on the even years, – Conduct the planning meeting at the same location and time as the Subcommittee on Design, – Rotate the location of the national conference so that the conferences are held throughout the country, – Develop training tracks and agenda, – Nominate and secure speakers, – Set fees to cover expenses, and – Provide awards for design and construction VE at the national conference (select award winners).

10 • Update VE guidelines at least every 10 years: – Complete update of 2001guidelines by 2011, – Work with the task force on D/B to jointly develop best practices for VE for D/B by late 2003, and – Develop guidelines for VE performance measures by 2005. • Maintain an active website providing information about transportation VE and the upcoming national VE conference. • Provide ongoing assistance to member states to: – Comply with the FHWA mandate, – Develop VE programs, – Provide VE training, and – Conduct VE studies. TRANSPORTATION AGENCY INVOLVEMENT The California Department of Transportation (DOT) (Cal- trans) is acknowledged to have established the first state VE program. Caltrans initiated its VA program in 1969. Its ini- tial focus was on standard specifications, standard plans, and selective elements of highway projects. However, highway projects were not extensively studied until 1985. Turner and Reark reported in 1981 that VE had not been generally applied to highway projects “because of tight schedules and the con- cern about designer’s reactions” (1, p. 9). The Caltrans VE program served as a beachhead for expan- sion into other STAs. In the 1970s, VE programs were initi- ated in Florida (1970), Idaho and Virginia (1973), Minnesota (1975), New Mexico (1977), and Oregon and Pennsylvania (1979). In most cases, these early VE programs focused on the improvement of standards and specifications, and staff training (1). FHWA monitors the application of VE on federal-aid proj- ects and produces an annual summary report (11). Table 1 summarizes the results for the 7-year period from 1997 to 2003. This corresponds to the time period that the FHWA VE Regulation has been in force. On average, 382 federal-aid VE studies were performed annually. This represents an increase of approximately 18% over the annual average number of federal-aid VE studies observed from 1993 to 1997. For the latest 5-year period, from 1999 to 2003, the 10 most active STAs (Virginia, Florida, California, Texas, Pennsyl- vania, New Jersey, North Carolina, Tennessee, Washington State, and Ohio) completed 64% of the total number of VE studies (1,872) performed on federal-aid projects. This is illustrated in Figure 1. The number of VE studies is presented in Figure 2. The average cost per VE study is presented in Table 2. The average cost per study, calculated from the FHWA VE program reports for the 10 most active STAs, ranges from $2,600 to $60,000. This wide variation in study costs likely reflects differences in how costs are attributed to VE studies, size and composition of the VE team, duration of the VE studies, and complexity of the project being reviewed. For example, California’s relatively higher average cost per study takes into account longer study durations—Caltrans typically uses 6-day workshops instead of 5-day workshops—and large study teams assembled for relatively complex projects. VE Program Metrics FY 1997a FY 1998a FY 1999b FY 2000a FY 2001c FY 2002c FY 2003d Total/Avg. No. of VE Studies 369 431 385 388 378 377 344 2,672 Cost of VE Studies Plus Administrative Costs $5.10 $6.58 $7.47 $7.78 $7.29 $9.02 $8.45 $51.69 Estimated Construction Cost of Projects Studied $10,093 $17,227 $18,837 $16,240 $18,882 $20,607 $19,241 $121,127 Total No. of Recommendations N/A 2,003 2,082 2,017 2,013 2,344 2,144 12,603e Total Value of Recommendations N/A $3,084 $3,227 $3,483 $2,375 $3,050 $3,163 $18,382e No. of Approved Recommendations N/A 743 848 1,057 1,017 969 914 5,548e Value of Approved Recommendations $540 $770 $846 $1,128 $865 $1,043 $1,016 $6,208 Return on Investment 106:1 117:1 113:1 145:1 119:1 116:1 120:1 120:1 Source: Annual Federal-Aid Value Engineering Summary Reports (11). Notes: Amounts shown in millions of dollars. N/A = not available. a52 agencies reported in fiscal year (50 states, District of Columbia, and Puerto Rico). b53 agencies reported in fiscal year (50 states, District of Columbia, Puerto Rico, and Virgin Islands). c53 agencies reported in fiscal year (50 states, District of Columbia, Puerto Rico, and FLH). d50 agencies reported in fiscal year (47 states, District of Columbia, Puerto Rico, and FLH); Kentucky, Louisiana, and New Hampshire did not report results. eTotals do not include results from FY 1997, which were unavailable. TABLE 1 FEDERAL-AID PROGRAM VALUE ENGINEERING SUMMARY, 1997–2003

11 Also consider that some STAs might use in-house exper- tise for their studies, whereas other agencies might use exter- nal consultant team leaders and specialists. The total cost of a person-hour is generally understood to be the aggregate cost of salary, benefits, and corporate overhead. Additional project costs, pertaining to other expenses such as printing and travel, should also be considered. For consultants, the costs associated with external VE study participants are usu- ally readily apparent and traceable because the expertise has been acquired through some form of contractual agreement. However, in-house costs are typically more difficult to track because many agencies are generally not able to fully con- sider the total cost of staff time or to reflect the true value of the expertise to the project. The FHWA “racing form” (11) is primarily a financial reporting tool to satisfy the legislation requirements regard- ing VE. The tabular format permits easy comparison between two or more STAs in a global sense and likely creates com- petitive interest between agencies. More than 200 Studies 100 to 200 Studies Less than 200 Studies FIGURE 1 Ten most active STAs performing VE studies, 1999–2003 (11). 256 245 141 100 93 89 82 66 65 60 0 50 100 150 200 250 300 VA FL CA TX PA NJ NC TN WA OH Fe de ra l-A id V E St ud ie s Co m pl et ed D ur in g 19 99 -2 00 3 FIGURE 2 Most federal-aid VE studies by state completed during 1999–2003 (11).

Many STAs now have VE websites that are used to dis- seminate information internally or to consultants. This infor- mation typically includes applicable policy, procedure, and guideline documents. VE workshop forms and agency suc- cess stories may also be accessible on-line. SAVE INTERNATIONAL INITIATIVES SAVE International, the U.S.-based professional society pro- moting worldwide VM, has traditionally taken a supportive role regarding the application of VE in transportation. The society, originally named the Society of American Value Engineers, was formed in 1959 to promote the education and experiences of the value community in the United States. As interest in VE extended to other countries, so did SAVE’s focus. Today, it enjoys strong working relationships with affiliates and other value societies around the world. SAVE has forged ties with the AASHTO VE Technical Committee as well. A member of the Technical Committee typically leads a transportation-focused forum at the annual SAVE conference. The society’s primary role with respect to VE in trans- portation is in the education and certification areas. SAVE is the governing body responsible for the certification of value 12 specialists. Approximately 60% of the transportation agen- cies surveyed indicated that the VE team leader “always” or “often” had to be a Certified Value Specialist. As such, the continued ability of SAVE through its certification program to ensure that certified VE team leaders are available to lead highway VE studies remains a critical role. MILES VALUE FOUNDATION The MVF was established as “a non-profit public founda- tion dedicated to the advancement of the state-of-the-art of VM through planning, research, and education.” MVF is focused on • Creating and promoting teaching of the VM courses at the university level, • Promoting public awareness, and • Encouraging research and development through schol- arships and grant programs. The foundation does not specifically have an influence on VE applications in transportation. However, MVF is an excellent resource to value practitioners, academics, and researchers. In addition, educational ties have been forged with several universities aimed at strengthening the value industry with the introduction of “entry level” value practitioners. No. of Federal-Aid VE Studies Cost of Federal-Aid VE Studies STA In-house Consultant Total In-house Consultant Total Virginia 255 1 256 $4.01 $0.01 $4.03 $15,700 Florida 88 157 245 $1.68 $3.61 $5.28 $21,600 California 12 129 141 $2.66 $5.80 $8.46 $60,000 Texas 0 100 100 $0.00 $1.10 $1.11 $11,100 Pennsylvania 83 10 93 $0.22 $0.26 $0.48 $5,200 New Jersey 89 0 89 $1.10 $0.00 $1.10 $12,400 North Carolina 82 0 82 $0.21 $0.00 $0.21 $2,600 Tennessee 57 9 66 $0.27 $0.05 $0.32 $4,800 Washington 52 13 65 $0.43 $0.32 $0.76 $11,700 Ohio 17 43 60 $0.03 $0.62 $0.65 $10,800 Total 735 462 1,197 $10.61 $11.77 $22.40 $18,700* Source: Annual Federal-Aid Value Engineering Summary Reports (11). Note: Cost values in millions of dollars, except for Average Cost per Study. *Average study costs for the 10 most active STAs. Average Cost per Study TABLE 2 FEDERAL-AID VALUE ENGINEERING STUDY COSTS FOR 10 MOST ACTIVE STAs PERFORMING VE ESTIMATES, 1999–2003