Value Engineering: An Incredible Return on Investment
Value engineering (VE) may be only common sense, but it's a concept that can pay some uncommonly big dividends.
Transportation Secretary Rodney E. Slater reported earlier this year that state and local transportation departments saved taxpayers a record $750 million in fiscal 1998 by implementing VE in highway projects.
"Value engineering demonstrates President Clinton's commitment to common sense government," Slater said. "Federal programs like this allow DOT to work with states to build roads that are safe; to stretch the buying power of federal dollars; and, in some cases, to complete roadway projects ahead of schedule."
"Ultimately, every taxpayer benefits," he said. "Value engineering is beginning to pay off - literally - and states that have developed active programs are finding the results well worth the investment." In fiscal year 1998, the return on investment was more than 120 to 1.
As promoted by the Federal Highway Administration (FHWA) and implemented by state and local governments, VE has repeatedly demonstrated its ability to reduce project costs, improve quality and productivity, foster innovation, and eliminate unnecessary and costly design elements.
What Is Value Engineering?
VE was developed during World War II by Lawrence Miles of General Electric. Seeking a way to make the most efficient use of war-limited funds and raw materials, Miles devised a team-oriented technique that determines the objective of a project, service, or process; analyzes functions; and examines each step for ways to increase efficiency and to cut costs and completion time.
Generations of VE users have found it to be a multidisciplinary, systematic tool that is very useful for identifying, analyzing, and solving problems. By carefully examining each component of an undertaking, VE helps to find new and better ways of doing things. It can be used in building highways, constructing factories, designing office procedures, and even in purchasing the family automobile.
While there is no single VE formula, the process used by the Washington State Department of Transportation (WSDOT), as explained on its Web site (www.wsdot.wa.gov), provides a picture of how VE is used in highway planning and construction. The process has the following eight steps:
- Selection Phase: Select the right projects, team, timing, processes, or elements.
- Investigation Phase: Investigate the background information, technical input reports (such as traffic, soils, hydraulic, environmental, crashes) and field data, function analysis, team focus, and objectives.
- Speculation Phase: Be creative and brainstorm alternative proposals and solutions.
- Evaluation Phase: Analyze alternatives, technical evaluation, life-cycle costs, documentation of logic, and rationale.
- Development Phase: Develop technical and economic supporting data to prove the feasibility of the desirable concepts or ideas. Develop team recommendations. Recommend long-term as well as interim solutions as applicable.
- Presentation Phase: At the conclusion of the study, present the findings and recommendations of the VE team in an oral presentation, a written report, and a workbook. In many cases, the way the findings are presented can be as important as the findings themselves.
- Implementation Phase: The recommendations formulated by the VE team are given a fair and thorough evaluation by the appropriate managers of the department. Prepare an implementation plan, including the response from the managers and a schedule for accomplishing the recommendations.
- Audit Phase: Establish a record system to track the results and accomplishments of the VE program on a statewide basis and to compile the appropriate statistical analysis as requested by management personnel.
The WSDOT Web site says the types of projects that usually provide the highest potential for value improvements are:
- Projects with alternative solutions that vary the scope and cost.
- New alignment or bypass sections.
- Widening of existing highways for capacity improvements.
- Major structures.
- Interchanges of multilane facilities.
- Projects with extensive or expensive environmental or geotechnical requirements.
- Projects with difficult materials requirements or inferior material sources.
- Major reconstruction of existing highways.
- Projects with major traffic control.
- Projects with multiple stages.
"The goals of VE are continuous improvement and design enhancement," WSDOT's Web page states. "VE provides assurance to our customers that cost-effective projects are being achieved."
Virginia Department of Transportation (VDOT) Management Services Administrator Larry D. Jones, who oversees VE programs, noted that VE is not simply a cost-reduction program; it is a way of determining maximum value.
"Most often, cost reductions are recommended, but in some instances, we'll recommend an increase," he said. "Because, while short-term costs are increased on a specific project, if that means that bridge or road lasts longer and we'll need less ongoing maintenance, we'll pay less throughout the lifetime of the facility. We call that a life-cycle cost reduction."
FHWA and Value Engineering
The Federal Highway Administration became involved in VE in 1970, with the Federal-Aid Highway Act's provision giving the secretary of transportation the authority to require a VE or other cost-reduction analysis on any federal-aid highway project. In 1973, FHWA assigned to its headquarters staff a full-time coordinator with the responsibility for administering FHWA's VE program. The VE program at FHWA expanded significantly in 1975, when the first contract to teach VE workshops to state departments of transportation (DOTs) was awarded.
For more than 20 years, FHWA's policy was to encourage and not require state DOTs to adopt VE. It performed this role by promoting and teaching VE and providing technical assistance to state DOTs - an approach generally supported by the states, which have preferred to remain in charge of their own programs. FHWA has presented more than 300 VE workshops and has taught the VE process to more than 8,500 people.
As with many other highway engineering and management issues, FHWA has also worked with the American Association of State Highway and Transportation Officials (AASHTO) to encourage the use of VE. In 1985, AASHTO formally recognized VE as an acceptable review process in highway development, and FHWA was instrumental in getting the association to develop and publish the AASHTO Guidelines on Value Engineering in 1987.
But despite state acceptance of FHWA's voluntary approach to VE, fewer than a dozen state DOTs developed active VE programs. While state DOTs performed an average of 324 VE studies per year between 1993 and 1997, only 11 states maintained active VE programs that averaged five or more studies per year, and these 11 states performed 78.5 percent of all the state VE studies carried out nationally. Of the remaining states, 16 averaged between two and four studies per year, and 25 averaged one or fewer studies per year. (These numbers add up to 52 "states" because they include the DOTs for the District of Columbia and Puerto Rico.)
A study required by the Intermodal Surface Transportation Efficiency Act of 1991 gave FHWA its first long-term look at the effectiveness of its policy to encourage, but not mandate, VE. The study, sent to Congress in 1993, concluded that while it had succeeded in making VE part of the general highway-development process, the policy had been unsuccessful in terms of the number of states adopting VE.
In this study, the states with VE programs said that they adopted VE because:
- VE saves money and ensures that projects are cost-effective.
- VE improves the quality of the project.
- VE can eliminate unnecessary design elements.
- VE fosters innovation and improves productivity.
States that did not adopt VE cited a lack of staff and time to perform the studies and argued that VE duplicates existing programs and in-house project reviews.
Part of the problem has clearly been a lack of success in selling the VE methodology to top state DOT management (and, in some cases, even FHWA management). This can be attributed in part to the fact that top managers seldom attend VE workshops, probably because they do not have time to participate in week-long training sessions. While management-oriented VE briefings can help promote VE, they cannot explain and sell the methodology as effectively as a hands-on workshop.
Some state management officials are also concerned that adopting VE will simply add another review to what they consider long-standing and effective highway development processes. They worry that VE studies will delay projects or will change project aesthetics, environmental goals, AASHTO/state design standards, or public hearing agreements. In short, without a clear understanding of VE methodology, many managers mistakenly believe there is little to gain in performing a VE review rather than a standard project review.
The Federal Mandate
The National Highway System Designation Act, passed by Congress in November 1995, requires the secretary of transportation to "establish a program to require states to carry out a value engineering analysis for all projects on the National Highway System (NHS) with an estimated total cost of $25 million or more." FHWA regulations implementing the mandate were written to allow the states the greatest possible flexibility, containing only those requirements expressly imposed by Congress. States are free to chose when and how to perform their VE studies and who will carry them out; however, the rules do provide guidance on such issues as team makeup, the use of consultants, and funding eligibility.
Federal mandates tend to be unpopular with states, even if state officials agree with the requirements. The VE mandate has been no exception. States that already had active VE programs when the mandate was imposed have found that they had to make few, if any, changes in their procedures. Some other states that did not have active programs have gone even further than required by law by establishing VE programs that cover all projects they believe can benefit from a VE analysis and not just the ones called for in the mandate. A few states strongly disagree with the mandate, and they have developed VE programs to perform only the minimum number of NHS studies required by law.
FHWA has continued its VE marketing efforts, working with state DOTs, primarily through the AASHTO VE task force, to promote use of the process. Members of the task force, consisting of 11 state VE administrators and FHWA's VE coordinator, visit other state DOTs to brief management on VE, assist in the development of VE policies and procedures, and lead VE studies. The task force also plans, markets, and facilitates the AASHTO VE conference. This well-attended national conference provides a forum for sharing information about state VE programs, training opportunities, and VE experiences and philosophy. The conference also offers opportunities for networking with other state, federal, and industry personnel.
Starting with the 1997 AASHTO VE conference, FHWA has presented "outstanding achievement" awards to state DOTs for "exceptional accomplishments in applying and promoting value engineering." In 1997, awards were given to Missouri, New Jersey, and Virginia. At the 1999 conference in July, California, Florida, and Washington state received awards.
It should also be noted that by requiring states to follow standard VE methodology in performing studies, the VE mandate has reduced or eliminated some other types of reviews - independent reviews such as plan-in-hand, design, cost reduction, alternate design, and cost/benefit. This encourages more state DOTs to become familiar with the genuine VE concept and thus increases its acceptance.
The Value of Value Engineering
In fiscal year 1998, state highway and transportation departments completed 421 VE studies. Based on these studies, 735 alternatives and recommendations were approved. The resulting $750 million in savings was the largest in the program's history and represented a 47-percent increase over fiscal year 1997 savings. State DOTs spent $6.23 million to administer their VE programs; that means the states had a return of $121 for every dollar spent.
California was the first state to demonstrate the benefits of "value analysis." The California DOT program started in 1969 - three years before FHWA began promoting VE. During the last five years, California has conducted more than 200 studies and, as a result, has saved more than $400 million.
Over the past five years, the Florida DOT VE program has been the largest in the nation. During this period, the Florida DOT has conducted more than 320 VE studies and has achieved more than $100 million in VE savings each year.
Some states also make a point of announcing the savings from their individual VE programs. VDOT said in a press release that its program had saved taxpayers $252 million since 1990, including $62.9 million during fiscal 1998. VDOT averages more than 65 VE studies per year on proposed highway improvement projects and has achieved a savings to cost ratio of more than 85 to 1. Also, VDOT has trained more the 1,900 employees in VE principles.
Virginia was the first state in the nation with a mandated VE program; the General Assembly passed legislation requiring VE in 1990.
"At VDOT, we are always looking for better and smarter ways to improve transportation in Virginia," said state Transportation Commissioner David R. Gehr. "Value engineering provides us with an effective means of increasing quality, while at the same time decreasing costs, and that means taxpayers' dollars are more wisely spent."
VDOT cited several recent projects on which VE offered considerable savings, including the improvement of a 55-kilometer section of Route 58 from Stuart to Hillsville. VE studies saved approximately $11 million on the project, which consisted of raising grades to reduce bridge lengths, adding a truck stop/brake check area, improving interchanges and pavement marking, extending the life cycle of drainage pipes, reducing earthwork quantities, and minimizing the impact of Route 58 where it crosses the Blue Ridge Parkway.
In another example cited by VDOT, VE saved $4.5 million during modifications to the interchange at Route 1025 and Route 58 in Patrick County. The VE recommendations eliminated the acquisition of seven residential properties and 8 hectares of developable land and reduced excavation quantities by 650,000 cubic meters.
WSDOT said some recent VE recommendations and the resultant savings on Washington state projects included:
- Adjusting a railroad alignment to allow for a bridge pier, permitting the use of a precast structure, rather than cast-in-place structure, and saving $13.5 million.
- Shifting the alignment of a frontage road, eliminating the need for retaining walls and saving $1.2 million.
- Revising a roadway profile, reducing the number of embankment and retaining walls required and saving $969,000.
- Lessening a bridge skew angle, reducing bridge surface area and increasing earthquake resistance, for a savings of $873,000.
- Using enlarged drainage culverts instead of large vaults, avoiding $500,000 in right-of-way costs.
In the words of Federal Highway Administrator Kenneth R. Wykle, "We have been actively promoting value engineering as an effective technique for reducing costs, increasing productivity, and improving quality without adversely affecting a highway project's design, aesthetics, or environmental goals."
As successful as VE has been in improving the way highway projects are carried out across the nation, there is still plenty of work to be done in educating managers and other key personnel about the advantages of this proven, effective tool. Managers must understand that return on investment of time, talent, and money (a return of $121 in savings for every $1 spent on VE in fiscal year 1998) is so great that VE is not simply worthwhile, it is compelling. FHWA will continue to play an active role in helping states understand the real value of value engineering.
Keith Borkenhagen is the FHWA Value Engineering coordinator. Since his appointment to this position in October 1991, he has made numerous VE presentations to local, state, federal, and national audiences; taught more than 30 VE workshops; prepared FHWA's 1993 Value Engineering Report to Congress; and wrote FHWA's Final Value Engineering Rule to implement the National Highway System Designation Act's VE requirement. He also serves on the AASHTO VE task force. He began his career with FHWA in 1968 and has served in several field offices and the Washington headquarters. He holds bachelor degrees in civil engineering and naval science from the University of Wisconsin and is a registered professional engineer in Illinois.