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

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9 how the STAs viewed their individual VE programs. For FHWA issued its VE Regulation 23 CFR Parts 627 in example, Borkenhagan noted that agencies adopted VE to February 1997 (8). The regulation requires that each STA establish a VE program for NHS projects with total projected Save money and ensure cost-effectiveness, costs of more than $25 million. Each program will focus on: Improve quality, Eliminate unnecessary design elements, and Improving project quality, Foster innovation and improve productivity. Reducing project costs, Fostering innovation, Agencies that had not achieved success with VE often Eliminating unnecessary and costly design elements, cited a lack of resources (staff and time) to complete the VE Ensuring efficient investment in NHS projects, and study. Some STAs noted that VE appeared to duplicate exist- Develop implementation procedures. ing programs such as in-house engineering reviews. A key aspect of success appears to be the level of buy-in at the man- A companion FHWA VE Policy was issued in September agement level. 1998 (9) to provide policy guidance for VE studies under- taken on federal-aid projects. The FHWA VE Regulation and In 1991, an audit of federal VE practices by the President's Policy are included in Appendix A. Council on Integrity and Efficiency concluded that more could and should be done by federal agencies to realize the A designbuild (D/B) contracting regulation was reviewed benefits of VE. Principal direction was issued by the Office in 2002. A Notice of Proposed Rulemaking was extensively of Management and Budget (OMB). OMB Circular A-131, discussed in late 2002 (10). The Federal Register presented updated in May 1993 (7), requires all federal departments and the final ruling that VE would be required on all NHS D/B agencies to use VE, where appropriate, to reduce program and contracts before the release of the D/B request for proposals acquisition costs. Circular A-131 also stipulated that each (RFP). The ruling also notes that a pre-RFP VE study would department or agency be required, as a minimum, to not preclude future additional VE studies on the NHS project. Designate a senior management official to monitor and The AASHTO VE Technical Committee (formerly Task coordinate the VE activities, Force) was established to assist the STAs through positive Develop criteria and guidelines to identify programs promotion and distribution of VE knowledge. The VE Tech- and/or projects with the most potential to yield savings nical Committee's charge statement defines its function and when VE is applied, responsibilities. Assign responsibility to a senior management official to grant VE study requirement waivers for certain pro- To establish and maintain policy to assist states in the develop- grams and/or projects, ment of individual Value Engineering Programs, ensure integrity and uniformity of VE practices, and promote VE Provide VE training to staff involved in VE, within all areas of state and federal transportation programs. Ensure that VE funding requirements are included in Plan and deliver a biennial transportation value engineering the annual OMB budget request, conference. Maintain documentation records pertinent to the VE program, The VE Technical Committee developed the following Adhere to applicable federal acquisition requirements, 20022012 work plan: Develop an annual VE program plan, and Report VE activities to OMB on an annual basis if the Plan, develop, and deliver a national VE conference annual total agency budget exceeds $10 million. every other year to assist states in developing, main- taining, and improving VE programs. OMB Circular A-131 is included in Appendix A. Deliver a national conference on the odd years: Hold a planning meeting for the national conference In November 1995, the U.S. Congress enacted the National on the even years, Highway Designation Act. This legislation instructed the Sec- Conduct the planning meeting at the same location retary of Transportation to establish a program requiring that and time as the Subcommittee on Design, STAs conduct VE analyses on all NHS projects with a cost Rotate the location of the national conference so that of $25 million or more. The act provided additional flexibil- the conferences are held throughout the country, ity at the state level in terms of how and when VE studies Develop training tracks and agenda, would be performed and by whom. Team composition restric- Nominate and secure speakers, tions (i.e., VE team members must be completely indepen- Set fees to cover expenses, and dent of the design process) and funding controls were also Provide awards for design and construction VE at the introduced. national conference (select award winners).