A Value-Based Approach to Managing Construction Projects
Trends and Research
While most industries have moved to a value-added or client-centered approach to deliver products and services, construction is still repeating obsolete practices. The process in which needs are translated into requirements, then drawing and specs, has barely evolved since the last century. Conceived in a relatively less complex business environment, these practices are increasingly unsuited to successfully meeting the changing expectations of complex organisations. Some reasons used to justify this status-quo are: the construction fragmented environment and the rigid legal framework of professional practice. There is also no incentive to improve; choices are based on the lowest bid; innovation is considered as an added risk. The objective of this paper is to shed light on initiatives that aim at changing the industry by moving from a cost-based to a value-based approach in construction. Elements of a value-based approach to managing construction projects will be introduced mainly through examples from British industry and a Canadian research project.
Following extensive research concerning the poor performance of their construction industry, the British government took the lead in architecting the industry system to make it a “World Class” industry. At the heart of its transformation plan is the aim to deliver the best value for money, and the best balance of quality and whole life cost to meet the user's requirements. To achieve this goal, the British government introduced industry benchmarking, endorsed project and program management processes, and, most significantly, redefined its procurement process approach from cost-based to value-based. A “Gateway” review process was also introduced to integrate the voice of the customer throughout the project lifecycle. However, some difficulties arose regarding the complexity of the review process. These difficulties were circumvented in a National Defence project using advanced configuration and requirement management tools. A research study was made to apply these tools to construction.
This paper will first describe why the traditional way of managing scope in a construction project cannot properly address the complex business needs of a modern organization. It will then present the new approach devised by the British government to avoid these problems and to build a “World Class” industry. In addition, a process model to manage construction program and project scope, using configuration and requirement tools, will be discussed.
Managing the scope
Value is a broad concept. Based on literature in the management of construction projects, value could be defined as: meeting clients' requirements with a minimum of waste (non value-added activities). Requirement is key in this definition: paraphrasing a well-known statement - ‘it is about meeting the right requirements right the first time.’ Value is not part of A Guide to the Project Management Body of Knowledge (PMBOK® Guide) vocabulary (PMI, 2004). However the definition of value generation in projects could be derived from the project scope management as being: “to realise all and only what is required by the client stakeholders to fulfill their needs”, ISO 9000 (2000) definition of a requirement being “a need or expectation that is stated, generally implied or obligatory.”
In traditional construction, the definitions of value and requirements are more related to the technical execution of the project, which makes the introduction of customer-driven concepts, such as “the voice of the customer” in the delivery process, difficult. In construction, the owner of the requirements is not the client but the professional. The professional considers capturing clients' requirements as a single event occurring in the briefing process at the outset of the project. Authors Latham (1994) and Barrett (1999) describe this process as both critical to successful construction, but problematic in its effectiveness. The professional is ill-equipped to understand and manage complex client requirements. Approaches in defining the functional and technical requirements are not systematic, and often written in such technical jargon that the clients' stakeholders cannot relate them to their business needs. Moreover, these requirements are not considered as a baseline for measuring the project success, but as a starting point from which design concepts can be derived and compared. Value is not associated with clients' requirements, but with cost reduction, cost being the key project management performance measurement in construction, loosely followed by schedule. Not much attention is given to meeting the user expectations; even less is given to measuring their satisfaction with post-occupancy audits.
The value and requirement semantic gaps could be explained by the cost-based procurement process used in construction, which often gives to the producers' (professionals, contractors) stakeholders both the responsibility to define the requirements and to deliver the end result, the key indicator being the lowest cost to realize what is described in the design and specifications. This stems from the client risk adverse attitude to requiring assurance on the final cost by transferring all the risks to the producers through closed contracts, without having the ability to properly define requirements. In addition, the client, by fragmenting his procurement to build his resource base, alleviates the producers' capability to streamline his delivery process by integrating their team and their supply chain. These are a major source of conflicts, added costs, suboptimal facilities, and project failure.
In summary, with this attitude, the client is paying a premium to increase his risks: he not only does not get what he wants - and often does not know it because he is not the owner of his requirements - but is also paying more by focusing only on costs. This paradox is described in Exhibit 1.
Exhibit 1: Inefficiencies in managing clients' requirements
First, there is a performance gap (Winch, 2002) engendered by the loss and alteration of the initial client requirements. It typically takes place during the producer's traditional linear translation process of needs to requirements to design, and to the end results. Because client handling of the briefing process is often messy, fuzzy or ill-defined (Kelly, Morledge & Wilkinson, 2002), the professionals build assumptions on the client needs and requirements based on their perceptions of customer value, which tend to be influenced by their professional and personal backgrounds (Whelton & Ballard, 2003). The effort to reduce the performance gap during the requirement lifecycle generates numerous adjustments and iterations that are non-added value activities. Because requirements are not managed, and value generation is not measured, these non-added value activities create waste or unnecessary costs.
Scoping with a value perspective
Some will argue that the concept of value is not new to construction. It is already expressed through the disciplines of Value Management (VM) and Value Engineering (VE). ‘Hard’ VM is control of unnecessary cost, a way to achieve identified functions at minimum cost by following systems engineering traditions (Miles, 1972). ‘Soft’ VM complements this “hard” VM definition by qualifying it as a structured approach to defining what value means to a client in meeting a perceived need by establishing a clear consensus about the project objectives and how they can be achieved. ‘Soft’ VM focuses on the client briefing process (Kelly, Male & MacPherson 1993), and also dwells on the strategic interface between client organisations and construction projects (Cherns & Bryant 1984; Barton 1996). Both definitions integrate VE, a systematic approach to delivering the required functions at lowest cost without detriment to quality, performance and reliability (Connaughton & Green, 1996). VM, first a cost engineering discipline, is slowly evolving in its soft form to include concepts from quality management and other related disciplines. However, while VM techniques help to address the performance gap, they don't offer a systematic approach to planning, managing, and tracking requirements. Furthermore, VM does not consider management of the stakeholders' emerging needs. In product and software development, processes, techniques, and tools based on System Engineering (SE) are used to effectively manage requirements - the true voice of the customer. It is the author's view that, to get best value for money, the client has to become the owner of his requirements and has to build in-house capabilities to properly define and manage them. However, not much research has been done to derive from SE practices an effective way of managing requirements in construction. In the industry, there are two examples that provide some direction on how to infer a systemic and systematic approach, from SE practices, to deliver the best value for money.
Architecting a value-based construction paradigm: the British initiative
“Property can be one of the largest costs firms face and businesses increasingly need to think strategically about their property needs. Many organisations will only occasionally commission a construction project; which is why it is important to think clearly about how to be a smart client”
Digby Jones Director General, Confederation of British Industries
Construction clients are considered as the major steering force for directing construction processes and results (Ryd, 2004). However, the client needs to develop abilities to manage his requirements and to change his perception of value and risk, to move from a cost-based to a value-based management of construction projects. Also, one client doesn't have the leverage to change the practices of an industry. The industry is a system built on a country value and culture (McCabe, 2001). To change the industry, a national strategy is needed.
Exhibit 2: The British Government Strategy
This was the road undertaken by the British government which has embarked on a major initiative to shape its construction industry as “World Class” or “Best in the business” in order to get the best value for the money. They commissioned a series of studies, first to determine the government's and industry's ability to deliver value, then to formulate and implement a course of action. It was found that drastic changes were required both in the way that the government procures and industry delivers. A systemic, multi-pronged strategy (Exhibit 2), focused on developing a continuous improvement culture was devised:
- To increase the client's ability to plan and to manage construction projects;
- To change the procurement process in order to move from a confrontation environment to a collaboration and team learning culture;
- To provide industry with the means to improve itself.
The British government strategy to improve clients' capabilities is two-fold: to provide tools to make both public and private clients smarter, and to turn the public service into an exemplary client. To make the clients smarter, it introduced a tool, “the client charter”, which provides real estate consumers with a web-based capability checklist for measuring its project readiness, and steps to build a business case and a project charter.
Within the public service, the Office of Government Commerce (OGC), a branch of the British Treasury, was given the mandate to turn the public service into an exemplary client. The Office is responsible for helping public sector organisations to improve their efficiency, gain better value for, and deliver improved success from programmes and projects. They have ambitious targets to meet: i) efficiency gains of $40B annual by 2007/08; ii) $6B saving by 2007/08 in central Government procurement, and iii); improvement in the success rate of missions' critical projects. To achieve this, OGC developed an aggressive change management strategy with the following key features:
- A standardization over all departments and for all disciplines, including construction, on project and program management methodology, processes and tools;
- An organizational maturity process combined with a total quality improvement philosophy;
- A focus on people: making them a key part of the transformation process by increasing their capabilities and creating stimulating work environment to boost their productivity;
- A strong emphasis on measuring performance, auditing processes and meeting set targets.
The main initiative to support this strategy was the implementation of the Successful Delivery programme, which includes leading-edge organisational project management features, such as:
- Organizational project management capabilities: Centres of Excellence are implemented in each department to bring together a set of essential functions to support the successful delivery of programmes and projects, and also supports the strategic oversight of programmes. They are also responsible for providing a continuous overview across all of a department's portfolio of programmes and for challenging what must be delivered and how it will be delivered.
- Project tracking through a Gateway process: Acquisition programmes and procurement projects are subject to OGC Gateway Reviews at critical stages in their lifecycle to provide assurance that they can progress successfully to the next stage. The quality of the deliverables to provide best value for the money is evaluated at each review.
This strategy had a major impact on the way construction projects are planned and managed. The definition of new building projects is now based on specific business outcomes, such as improving collaboration between members in a department, or reducing the lifecycle cost of a building operation. The reasoning behind this is expressed through the 1-5-200 ratios. Operating a building in its lifecycle represents five times its construction costs, the business operation within the facility 200 times its construction costs. It is thus worth investing in better building to improve the business operation and reduce operation and maintenance costs. In this strategy, building is also no longer considered only as a facility to support business operations, but as one of the means of realizing a program's outcome. The contribution of the project to the expected program result has to be demonstrated. Its relationship with other related projects in the programme also has to be managed.
Another element of the strategy is to change the procurement process. The government policy was modified to move from a cost-based to a value-based procurement process, in which the client is the owner of the requirements and the producer is responsible for finding and delivering the best valued solution. In this scenario, Government clients recognize their key role in value generation, and commit to maximizing by continuous improvement of the efficiency, effectiveness and value for money of their procurement of new works, maintenance and refurbishment.
To overcome the problem of industry readiness for such a change, the government created, in collaboration with the industry key players, the Strategic Forum, a steering committee that coordinates public and private programs and initiatives. The most important initiative dealing with the private sector is “Constructing Excellence” the vision of which is to realise maximum value to all clients, end users and stakeholders, and to exceed their expectations through the consistent delivery of world-class products and services. The programme aims to achieve a step change in construction productivity by tackling the market failures and selling the business case for continuous improvement through focused programmes in Innovation, Best Practice Knowledge, and Productivity and Engagement.
The National Audit Office (2005) reported the strategy preliminary results using a sample of 142 projects delivered between April 2003 and December 2004:
- 55% of the projects were delivered on budget, compared to 25% in 1999 with a saving of $2bn
- 63% of the projects were delivered on time compared to 34% in 1999
- other improvements include streamlined procurement process, innovative solutions to the design and delivery of construction projects, reduced environmental impact, safer working conditions, and improved whole lifecycle cost and value.
However, according to the same report, further value saving for money of up to $6bn was still possible, the objective being a 10% annual saving on project capital costs.
The British government has demonstrated the benefits of investing in a value-based strategy for managing construction projects. A much smaller initiative was undertaken in 2003 under Public Works and Government Services, Canada (PWGSC) to make possible a value-based delivery of projects and programs while maintaining traditional project delivery practices.
Engineering a value-based construction paradigm: a poor man scenario
In Canada, the National Steering Committee for Innovation in Construction report “Priorities for action” (2002) identified cost-based procurement as one of the main roadblocks to innovation in construction, and value-based procurement as the solution. The question of how to achieve this in the Canadian industry context was not considered. A research project (Forgues & Bégin, 2003) suggests using disciplines derived from SE, such as Requirement Management as enablers of value-based procurement. Department of National Defence, Canada's (DND) research project on weapon system development is the best reference in using requirement management for procuring and tracking projects results. The project aimed to infer SE best practices to transform PWGSC Project Delivery System (PDS) into a value-centered process.
In the ’70s, NDC recognized the importance of managing requirements for complex programs. For the Frigate program, it developed an in-house requirement tracking system to be used in conjunction with their Gateway review process. The process proved to be unmanageable and very costly (20% of the program). Learning their lesson, DND decided to invest in new processes, and chose to use off-the-shelf software tools instead. These new processes and tools were applied very successfully for the helicopter project requirements, with important productivity gains in reducing waste. Moreover, the requirement tools used allowed electronic performance-based procurement, and requirement-based project tracking and change management. The research project looked at what could be successfully derived from these projects to enhance the existing PWGSC PDS. Practices from the following disciplines were investigated:
- Data management: the act of receiving, identifying, recording, distributing, storing, retrieving and archiving of data elements;
- Configuration Management: baseline and requirements management process that provides managed control to all phases of a project life cycle;
- Requirement Management: an evolutionary, incremental and team approach to requirements gathering and development. It also includes a disciplined approach to change control.
These disciplines present the advantage of being independent of the nature of the product being developed or how it is being constructed. Their purpose is to ensure that all the development activities in a project are focused on the delivery of the desired solution, even when that solution is complex and requires different teams working on smaller units of the project. Requirement and Configuration Management are compatible with most development and design paradigms, and focus simply on managing and delivering expectations that are implicit in every development project. Properly integrated and supported by the right tools, these two disciplines greatly assist in the delivery of almost all products. The driving principles behind the development of a concept of an operation to improve the PDS were:
- The use of a requirement management system as the backbone for tracking value generation
- The formalization of a Gateway system based on configuration management principles
- The reuse, as much as possible, of existing processes to reduce the scope of changes to be achieved.
Construction projects consist of a large number of stakeholders with different and sometimes conflicting needs. Because of the ever-increasing complexity of projects, and the shrinking delivery time, some needs or requirements are not met, or inadvertently altered during the process. The purpose of Requirement Management is to ensure that the end products meet initial needs. The objective is to take broad and abstract business needs obtained from the stakeholders and translate or break them into a series of more precise, focused, unambiguous and manageable requirements that can be easily understood by the persons designing the product. This, in turn, allows the project manager to control the design, development, implementation, and testing of the end item so that the project delivers a product that meets the clients' expectations. The requirements tracking and control process involves setting up a documented process in which tracking of requirements can occur. The Configuration Management goal is to ensure an orderly process for the control of changes.
The strategy was to first overlay a configuration/management process on the existing PDS, then incrementally to replace and automate the complex, ill-structured and time consuming verification process with a systematic requirement management process. The proposed requirement management processes (Exhibit 3) includes 9 steps:
- Need planning stage: requirements are gathered from stakeholders, and a draft requirement specification is developed. These requirements are defined and validated with the customer making the requirements who will later approve change requests directly related to his set of requirements. Then the requirements are prioritized, and the requirement's specification is updated.
- Requirement stage: options are determined, reviewed and approved. Requirements are analyzed to ensure that they are clear, precise, meaningful, and measurable. The requirements are categorized to expose insufficient or incomplete areas to be addressed.
- Planning Stage: Functional and Non-Functional requirements are selected. Means to convey the requirements among all stakeholders are also devised.
- Requirements Verification Stage: assurance is provided that the Scope document is truly representative of the client's requirements; it is reviewed for feasibility and compliance with the intent of the stakeholders' commitments.
- Implementation Stage: the Commitment Acceptance activity is finalized, and the short list of requirements associated with the Scope document approved.
- Design Stage: the technical requirements are addressed in one or more design specifications. The requirements are traceable forward to the designs, and the designs are inspected to determine whether the requirements have been adequately addressed.
- Construction Document Review Stage: the designs are implemented. The designs are traceable forward to the product and documentation, which are then inspected. If the designs are not adequately implemented, some requirements might not be met.
- Verification Stage: requirements are verified through commissioning. The requirements are traceable forward to the commissioning descriptions, which should be inspected at the design phase. During commissioning, the results are tracked to identify which requirements have been met.
- Validation Stage will determine whether the correct product was built. A Quality Assurance (QA) group will validate that the deliverable addressed the expected business requirements.
Exhibit 3: Requirement Process Flow
While PWGSC's PDS requirement process concept of operations has yet to be tested, the British model provides an excellent success story, demonstrating that construction, in order to fully benefit from project management best practices, has to liberate itself from the cost-based project delivery approach and move to a value-based approach. Clients have to be the drivers of this change: they are the ones who will reap the benefits from better designed, more efficient and less expensive buildings.
Requirement management is perceived as the enabler for change. However, to own, manage, and track their requirements, clients have drastically to increase their abilities in organisational project management. The PMI Organizational Project Management Maturity Model (OPM3®) and its new program and portfolio management standards provide meaningful insights into mapping the industry roadmap for change. However, to address the complexity of inducing a value culture in the management of construction projects and programs, a broader approach at a regional level has to be architected. This is the route undertaken by Quebec industry through CERACQ and the PMI-Montreal Chapter initiatives.
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©2005 Daniel Forgues
Originally published as a part of 2005 PMI Global Congress Proceedings – Toronto, Canada