Value Engineering

Learning Objectives

  • Understand the definitions of Value, Function, and Life-Cycle Costing.
  • Apply the Value Equation to assess project functions against their costs.
  • Implement the Value Engineering Job Plan to systematically improve project value.
  • Differentiate formal Value Engineering from standard, reactive cost cutting.

Value

The ratio of function to cost. Value is increased by either improving the function without increasing cost, or by reducing the cost without degrading the function.

Function

The specific purpose or intended use of a project element, typically expressed as a two-word active verb-noun combination (e.g., "Support Weight", "Enclose Space").

Life-Cycle Costing (LCC)

The evaluation of the total cost of ownership of an asset over its entire life, including initial capital costs, operating costs, maintenance, and disposal.

Function Analysis System Technique (FAST) Diagram

A diagrammatic representation of the logical relationships between functions of an item, project, or process, built on "How" and "Why" logic to establish a critical path of functions.

Value Engineering Proposal (VEP)

A value engineering recommendation developed and submitted by the design team or VE consultant during the design phase of a project.

Value Engineering Change Proposal (VECP)

A contractor-initiated proposal to change contract work under a value-engineering provision. Eligibility, review, approval, and any savings sharing are governed by the applicable contract and procurement rules; a proposal alone does not authorize a change.

Introduction to Value Engineering

Value Engineering (VE) is an organized approach to identifying and eliminating unnecessary costs in a project while maintaining or improving its quality, safety, and performance. Unlike simple cost-cutting, which often reduces the scope or quality of a project, Value Engineering focuses on the function of the project components. The core premise is: "How can we achieve the same (or better) function for less cost?"

Life-Cycle Costing in VE

Life-Cycle Costing (LCC) can help compare alternatives over a stated study period using consistent assumptions for initial, operating, maintenance, replacement, and end-of-life costs. It is one part of the evaluation: required function, safety, quality, performance, risk, schedule, and constructability remain decision constraints.

Interactive Simulation

Interact with the Life Cycle Cost Simulator below to see how changes in parameters affect costs.

Life Cycle Cost & Value Engineering

Value Engineering optimizes the total Life Cycle Cost (LCC)\text{Life Cycle Cost (LCC)} by balancing the Initial Cost (IC\text{IC}) with the Present Value of Maintenance (PVm\text{PV}_m). Use the sliders to explore how discount rates and maintenance affect long-term value.

Cost Parameters

$1.0M
$50,000
20
5%
LCC=IC+M×1−(1+r)−nr\text{LCC} = \text{IC} + M \times \frac{1 - (1+r)^{-n}}{r}
Present Value (Maintenance)
$0.62M
Total Life Cycle Cost (LCC)
$1.62M
Cumulative Life Cycle Cost Over Time$0.0M$0.5M$0.9M$1.4M$1.9MYear 0Year 5Year 10Year 15Year 20Initial Cost Base ($1.0M)LCC: $1.62M

Interactive Simulation

Compare two project alternatives based on their lifecycle costs. See how a higher initial cost can be offset by lower maintenance expenses over time.

Life-Cycle Cost Alternative Tradeoff

Compare the Present Value Life-Cycle Cost (PV LCC) of two alternatives. Often, an option with a higher initial capital cost provides better long-term value due to lower annual operating and maintenance expenses.

Option A (Lower Initial Cost)

$250,000
$40,000

Option B (Higher Initial Cost)

$320,000
$25,000

Global Parameters

15
6%
Option A Total PV LCC
$638,490
Option B Total PV LCC
$562,806
Recommendation
Option B is more cost-effective

Net Present Value Savings: $75,684

The Value Equation

The fundamental relationship in Value Engineering determines the overall worth or desirability of an element. Value can be increased by:

  • Maintaining the same function, but decreasing the cost.
  • Increasing the function, while keeping the cost the same.
  • Increasing the function AND decreasing the cost (the ideal scenario).
  • Increasing the function significantly with only a marginal increase in cost.

The Value Equation

Quantifies value as the ratio of a component's function to its cost.

Value=FunctionCost\text{Value} = \frac{\text{Function}}{\text{Cost}}

Variables

SymbolDescriptionUnit
Value\text{Value}The worth or desirability of the project element-
Function\text{Function}The performance, quality, or utility provided-
Cost\text{Cost}The life-cycle cost required to achieve the function-

Interactive Simulation

Use the Function-Cost Trainer to explore how adjusting the function score or the lifecycle cost impacts the overall Value Index of a project component.

Function, Cost, and Value Index Trainer

The core principle of Value Engineering is to maximize the Value Index by optimizing the ratio of Function\text{Function} to Cost\text{Cost}. Adjust the sliders to see how improving function or reducing cost impacts the overall value.

Parameters

100

A relative measure of performance, quality, or utility.

$500,000

The life-cycle cost required to achieve the function.

The Value Equation
Value=FunctionCost\text{Value} = \frac{\text{Function}}{\text{Cost}}
Value=100500000=2.00e−4\text{Value} = \frac{100}{500000} = 2.00e-4
Value Index (Scaled per $1k)
0.200

Higher values indicate a better return on investment for the required function.

The Job Plan (VE Methodology)

Value Engineering is typically conducted through a structured workshop following a standard methodology known as the "Job Plan". This multi-disciplinary process ensures rigorous analysis rather than random brainstorming.

The Value Engineering Job Plan

  1. Project Selection: Select and authorize the study scope and decision route.
  2. Investigation: Gather and verify project information, needs, costs, performance, schedule, and constraints.
  3. Function Analysis: Analyze functions, worth, cost, performance, and quality; describe functions with action-verb/measurable-noun phrases where useful.
  4. Creative: Generate alternatives that can provide required functions before evaluating them.
  5. Evaluation: Compare alternatives against mandatory constraints, technical feasibility, safety, quality, lifecycle cost, risk, schedule, and performance.
  6. Development: Turn selected ideas into supported recommendations with technical checks, estimates, risks, and an implementation plan.
  7. Presentation: Present the report and recommendations to the authorized project decision-maker for review and disposition.
  8. Close Out: Track implementation of approved recommendations and evaluate actual outcomes; record decisions for ideas not accepted.

The flowchart below shows the full study path. Only the authorized project decision-maker can approve implementation; a VE recommendation does not itself revise design documents or contract requirements.

Value engineering job plan

Move from study selection and investigation through function analysis, creative alternatives, evaluation, development, formal recommendation review, and closeout of approved changes.

Value engineering job planMove from study selection and investigation through function analysis, creative alternatives, evaluation, development, formal recommendation review, and closeout of approved changes.. Consider a project for VE study → Are scope, constraints, and decision authority clear?; Are scope, constraints, and decision authority clear? — Yes → Investigate project needs, data, cost, and constraints; Are scope, constraints, and decision authority clear? — No → Define study scope and approval authority; Define study scope and approval authority → Are scope, constraints, and decision authority clear?; Investigate project needs, data, cost, and constraints → Analyze function, worth, cost, performance, and quality; Analyze function, worth, cost, performance, and quality → Generate alternatives for required functions; Generate alternatives for required functions → Evaluate feasibility, lifecycle cost, risk, and performance; Evaluate feasibility, lifecycle cost, risk, and performance → Is any alternative suitable for development?; Is any alternative suitable for development? — Yes → Develop selected options into supported proposals; Is any alternative suitable for development? — No → Document findings; close or seek authorized scope revision; Develop selected options into supported proposals → Present the VE report and recommendations; Present the VE report and recommendations → Did the authorized project decision-maker approve?; Did the authorized project decision-maker approve? — Yes → Implement through approved design and change controls; Did the authorized project decision-maker approve? — No → Record the decision; retain the authorized design; Implement through approved design and change controls → Verify implementation and evaluate actual outcomes; Verify implementation and evaluate actual outcomes → Close the VE study record; Record the decision; retain the authorized design → Close the VE study record; Document findings; close or seek authorized scope revision → Close the VE study record

Consider a project for VE study → Are scope, constraints, and decision authority clear?; Are scope, constraints, and decision authority clear? — Yes → Investigate project needs, data, cost, and constraints; Are scope, constraints, and decision authority clear? — No → Define study scope and approval authority; Define study scope and approval authority → Are scope, constraints, and decision authority clear?; Investigate project needs, data, cost, and constraints → Analyze function, worth, cost, performance, and quality; Analyze function, worth, cost, performance, and quality → Generate alternatives for required functions; Generate alternatives for required functions → Evaluate feasibility, lifecycle cost, risk, and performance; Evaluate feasibility, lifecycle cost, risk, and performance → Is any alternative suitable for development?; Is any alternative suitable for development? — Yes → Develop selected options into supported proposals; Is any alternative suitable for development? — No → Document findings; close or seek authorized scope revision; Develop selected options into supported proposals → Present the VE report and recommendations; Present the VE report and recommendations → Did the authorized project decision-maker approve?; Did the authorized project decision-maker approve? — Yes → Implement through approved design and change controls; Did the authorized project decision-maker approve? — No → Record the decision; retain the authorized design; Implement through approved design and change controls → Verify implementation and evaluate actual outcomes; Verify implementation and evaluate actual outcomes → Close the VE study record; Record the decision; retain the authorized design → Close the VE study record; Document findings; close or seek authorized scope revision → Close the VE study record

  • Consider a project for VE study: terminator. A project sponsor or governing organization selects and authorizes the scope of a value-engineering study.
  • Are scope, constraints, and decision authority clear?: decision. Confirm the study question, required functions, nonnegotiable safety/quality criteria, participants, and authorized decision-maker.
  • Define study scope and approval authority: process. Clarify the project problem, boundaries, constraints, and who may approve recommendations before the study proceeds.
  • Investigate project needs, data, cost, and constraints: process. Review the project basis, design, performance needs, schedule, cost model, risks, and stakeholder requirements.
  • Analyze function, worth, cost, performance, and quality: process. Express functions as action-verb/measurable-noun statements where useful; distinguish required outcomes from the current design solution.
  • Generate alternatives for required functions: process. Develop multiple ways to perform the required functions before screening ideas. Do not equate VE with indiscriminate scope or quality reduction.
  • Evaluate feasibility, lifecycle cost, risk, and performance: process. Compare advantages and disadvantages against mandatory constraints, function, safety, quality, constructability, schedule, and lifecycle cost.
  • Is any alternative suitable for development?: decision. Screen out alternatives that fail required functions or mandatory constraints; record why no feasible option remains when applicable.
  • Document findings; close or seek authorized scope revision: process. Record why evaluated ideas were not advanced. Reopen the study only with appropriate sponsor authorization.
  • Develop selected options into supported proposals: process. Complete technical checks, sketches, cost and lifecycle estimates, assumptions, risk review, and an implementation plan.
  • Present the VE report and recommendations: document. Provide traceable analyses and disclose uncertainty; distinguish estimated savings from realized savings.
  • Did the authorized project decision-maker approve?: decision. Approval follows the project's governance and contract. A VE team's recommendation is not itself authorization to change the work.
  • Record the decision; retain the authorized design: process. Document the disposition and do not implement an unapproved design, specification, or contract change.
  • Implement through approved design and change controls: process. Update affected documents and execute the recommendation only after required technical, contractual, and project approvals.
  • Verify implementation and evaluate actual outcomes: process. Record whether the approved recommendation was implemented and evaluate observed performance and realized cost/schedule results.
  • Close the VE study record: terminator. Retain the recommendation, decision, implementation status, and outcome for project learning.

Interactive Simulation

Adjust criteria weights and alternative scores in the matrix below to see how weighted evaluations determine the winning Value Engineering proposal.

Weighted Evaluation Matrix

During the Evaluation Phase of the Job Plan, proposals are often scored using a weighted matrix. Adjust the importance (weight) of each criteria and the raw score of each proposal to see how the overall weighted score changes.

Criteria Weights

40%
30%
20%
10%

Proposal 1 Scores (1-10)

8
6
7
9
Weighted Total
7.30

Proposal 2 Scores (1-10)

5
9
9
8
Weighted Total
7.30
Winning Alternative
Proposal 1 is selected

FAST Diagrams

The Function Analysis System Technique (FAST) Diagram is a key tool in the Function Analysis phase. Moving left to right answers "How?", while moving right to left answers "Why?". This establishes a horizontal sequence of necessary functions.

When to Apply Value Engineering

Considering VE before major design and procurement choices are fixed can leave more feasible alternatives open. A study can also occur later when its scope, implementation effort, schedule effects, and approval route are understood; there is no universal design-stage cutoff.

Value Engineering vs. Cost Cutting

It is critical to distinguish formal Value Engineering from standard cost-reduction exercises, which often happen in a panic when bids come in over budget. True VE is never synonymous with cheapening a project.

Decision dimensionInformal cost reductionValue engineering
Starting pointA cost target or requested reductionA defined project need and required function
MethodMay assess one proposed cut or substitutionUses a structured, multidisciplinary Job Plan to generate and evaluate alternatives
EvaluationCan focus narrowly on initial cost unless controls are addedCompares function, safety, quality, performance, lifecycle cost, schedule, risk, and feasibility
AuthorityMust still follow project approval and change controlsTeam recommendations are reviewed; only the authorized decision-maker can approve implementation
Key Takeaways
  • Function over Form: VE explicitly analyzes what an item does (its verb-noun function), separating required performance from the physical object designed to achieve it.
  • The Value Equation: Value is the ratio of Function to Cost. True VE seeks to maximize this ratio, evaluating proposals over the entire life-cycle (LCC) rather than just initial capital expenditure.
  • Structured Methodology: The eight-phase VE Job Plan separates investigation, function analysis, creative idea generation, evaluation, development, presentation, and closeout; project selection authorizes the study.
  • Approval and Implementation: Recommendations are not changes until approved through project governance and required contract/design controls; closeout checks what was implemented and what outcomes resulted.

References