Project Management Institute

Heads or tails

Project Managers are often well versed in the processes of either value management or risk management; indeed some are familiar with the application of both methodologies. But how many project managers see Value and Risk Management as two sides of the same coin?


Do we need to choose between heads or tails; or can we throw the coin out of the window and look at both value and risk management in the same context?

This paper provides an introduction to the processes of value engineering and management and risk analysis and management. It then identifies how they can be jointly utilised on projects to increase efficiencies and reduce the uncertainties inherent in project management.

Value Engineering and Management

What is Value Management?

Value Management is concerned with motivating people, developing skills, advancing teams and promoting innovation, in order to maximise the overall performance of a project or business.

Value Management has evolved out of previous methods based on the concept of value and functional approach. These were pioneered by Lawrence D. Miles in the 1940's and 50's who developed the technique of Value Analysis (VA) as a method to improve value in existing products. Initially Value Analysis was used principally to identify and eliminate unnecessary costs, however it is equally effective in increasing performance and addressing resources other than cost. As it evolved the application of VA widened beyond products into services, projects and administrative procedures.

The Value Management Approach involves three root principles:

  • img     A continuous awareness of value for the organisation, establishing measures or estimates of value, monitoring and controlling them;
  • img     A focus on the objectives and targets before seeking solutions;
  • img     A focus on function, providing the key to maximize innovative and practical outcomes.

What is Value?

The concept of Value deals with the relationship between satisfying the requirements of different people and processes (Function) and the resources required to achieve this result (Resource). The fewer resources required or the greater the satisfaction of the requirements, the higher the value obtained. Stakeholders, defined as both internal and external clients, are likely to have different and possibly opposing views of what represents value. The aim of Value Management is to reconcile these differences and enable a project team or business to achieve the specified aims whilst minimising the resources required.

When commencing a value management study it is imperative to understand that value can be improved by increasing the satisfaction of requirements even if the resources used subsequently increase. However for this to be the case, the satisfaction of the requirements must be increased more than the increased resource usage.

The relationship between Function and Resources and the resulting Value can be demonstrated using a simple equation, as shown in Figure 1.

The Relationship between Function, Resource and Value

Figure 1 – The Relationship between Function, Resource and Value

Value Management Methodology

Value opportunities at the early stages of a project tend to be of a strategic nature; as the project develops these opportunities begin to recede and the engineering opportunities become more dominant. Due to the changing nature of the project's environment, formal Value Management studies are undertaken at important stages of the project, corresponding with updates of the cost estimate, as summarised below.

Feasibility, Concept and Preliminary Design

Value Management is a structured approach to defining what value means in the process of achieving the specified project requirements. This is undertaken by confirming a consensus about the project objectives and how these will be achieved by the project team. The process is strategic and involves challenging the requirements and confirming the project objectives.

Detailed Design, Procurement and Delivery

Value Engineering however is a systematic approach to delivering the required functions at lowest cost without detriment to quality, performance and reliability. This process is concerned with the project details and the delivery process to ensure that efficiencies are improved, over design is eliminated and therefore value is maximised.

Each value management study can be subdivided into the following distinct phases:

  • img     Information – Confirm the project objectives, programme and budget
  • img     Function Analysis – Agree the project function and available resources
  • img     Idea Generation – Identify value opportunities
  • img     Idea Evaluation – Rank the identified opportunities according to their appropriateness
  • img     Idea Development – Develop the evaluated opportunities to understand their benefits and costs
  • img     Decision Building and Action Planning – Establish the Way Forward

Benefits of Value Management

The most visible benefits resulting from the application of Value Management include:

  • img     Better business decisions by providing decision makers a sound basis for their choice
  • img     Improved products and services to external clients by clearly understanding their real needs
  • img     Enhanced competitiveness by facilitating technical and project innovation
  • img     Enhanced understanding of the project's aims by everyone involved
  • img     Improved communication and understanding of the main success factors for the project
  • img     Enhanced communication and efficiency by developing multidisciplinary teamwork
  • img     Decisions which can be supported by the stakeholders

Risk Analysis and Management

What is Risk Management?

Risk Management is a core element of project management and as such should be implemented by all professionals managing contracts, projects or business streams. The techniques are applicable to all scales of project, independent of size or nature; and should be properly understood by the key personnel from the planner and project manager through to the engineer and contractor.

As project budgets increase; so do the risks associated with the planning, development, design and implementation of projects. Through understanding the risks involved in projects and implementing cost effective techniques to reduce these risks; budget spending can be more accurately estimated, monitored and out turned; thereby ensuring that optimum efficiencies are achieved on individual schemes and programmes of projects.

The process of Risk Management is designed to remove or reduce the uncertainties (risks) that could threaten the achievement of a project objectives and as such should be regarded as an integral part of project management rather than a technique. Projects of all types have many inherent risks that have an impact on the ability of clients to deliver them. For construction projects, examples include varying ground conditions, resource availability, environmental constraints, requirements of statutory bodies and adverse weather conditions. Risks that are unresolved often result in cost increases, programme delays or quality reductions.

Risk Management Methodology

Risks at the early stages of a project tend to be of a strategic nature; as the project develops strategic risks begin to recede and engineering risks become more dominant. Due to the changing nature of a project's risk environment, formal Risk Studies are undertaken at important stages of the procurement process corresponding with updates of the scheme cost estimate.

Each risk study can be subdivided into the following three distinct phases:

  • img     Risk Identification: brainstorming a list of possible risks by scheme stakeholders
  • img     Risk Assessment: understanding how the risks occur and their possible effects on the scheme
  • img     Risk Management: regularly evaluating options for reducing the risks, quantifying their possible effects on the scheme and identifying options for their reduction

Risk Identification

The aim of Risk identification is to generate a comprehensive list of all the relevant risks that might have an impact on the project. When identifying potential risks, it is important to distinguish between the origin of a risk and its effect. The identification process will produce a schedule of potential risks that could affect the scheme cost, jeopardise the project objectives or the ability to deliver the scheme.

There are a number of methods for identifying potential risks including:

  • img     Structured review meetings with key staff
  • img     Risk audit interviews with key staff
  • img     Risk Workshop - The Risk Workshop is the most effective way of identifying risks and is generally the preferred method.

Risk Assessment

During a risk workshop, each risk identified should be categorised as having a high, medium or low impact and entered on the Risk Register. The first attempt at categorisation should be carried out swiftly based on the cost and occurrence probability. A Risk Ranking Matrix (Figure 2) should be used to assess ranking. Ranking risks in the order of severity provides a basis for selecting the priority for managing risks.

Risk Ranking Matrix

Figure 2 – Risk Ranking Matrix

Risk Analysis

To obtain a Risk Allowance for a particular risk, the probability of occurrence is modelled along with the cost impact should it materialise. Simple summation of all risks will assume that all risks identified will occur, resulting in risk over provision. In practice, not all risks identified will occur and hence the total Risk Allowance must be modified to take account of the characteristics of individual risks.

To achieve a robust forecast of the Risk Allowance, the project would need to be carried out many times over to achieve a statistically significant prediction of identified risks occurring. Since it is not practical to physically repeat the project many times over to determine Risk Allowances, mathematical modelling techniques can be used to assist. When undertaking risk modelling a number of different software packages can be used to undertake the risk modelling aspects. The information gathered from the workshop on risk estimate, probability, maximum and minimum variation of the risk estimate and the risk distribution curve type should now be transferred to the model.

Once all risk data has been transferred to the model, the simulations can commence to produce the Risk Allowance. Risk Allowances are usually quoted in terms of confidence levels. The outcome of risk simulations is represented as a histogram with confidence levels along the vertical axis and sums of money along the horizontal axis. This is a representation of the likely outcome of the risks (Figure 3).

Risk Analysis Histogram

Figure 3 – Risk Analysis Histogram

A confidence level of 100% will provide a Risk Allowance, where the actual cost of dealing with the identified risks is always below the predicted allowance. Budgeting for this would tie down a large amount of capital funds that could be used elsewhere. Since not all identified Risks are likely to occur, a Risk Allowance below 100% confidence level may be more appropriate, for example 80% or even 50% for projects where advanced risk management will be applied by all the parties.

Risk Management

For each project, a Risk Management Plan should be prepared. The plan comprises a register of all the risks identified and assessed and describes the risk management measures to be implemented to reduce and control risks. It summarises the results of the risk management process to date and should be updated at scheme progress meetings to record risks avoided, realised and the revised strategy for management.

By reviewing their project risk registers on a monthly basis, the project managers ensure that the risk mitigations are being undertaken within the required timescales, that the risk allowances remain appropriate and that new risks are being identified as they arise. This system of risk analysis is particularly beneficial when determining the procurement strategy to be utilised on specific schemes since it ensures a thorough understanding of the risks involved and their appropriate management response.

Benefits of Risk Management

Managing project risk is an integral part of good project management and is something most managers do already in one form or another. However, managing the risks of a project is often seen as an activity confined to already established project outline activities.

The concept of project risk management has been extended to the assessments of all risks associated with the project, including those associated with the definition of specific project goals and the interactions of the project with other company activities. The formalised approach ensures that this is done in a structured, systematic, way, so that all risks are identified and managed appropriately.

The principal benefits of risk management are:

  • img     Managing and thus reducing a project's exposure to risk
  • img     Minimisation of financial loss from project risks
  • img     Improving the confidence of meeting the project cost, schedule and performance targets
  • img     Having an auditable system for risk identification, assessment and control.

Combined Value and Risk Management

Value and Risk Management are effectively applied in the UK construction sector as individual techniques. However they are both examining the uncertainty associated with projects and could therefore be considered as a joint technique, in fact as two sides of the same coin. Value Management is concerned with resolving the uncertainty in the project objectives and ensuring that the project is delivered as value for money. Risk Management is concerned with resolving the uncertainty in the project itself and its outcomes ensuring that the specification is achieved within the prescribed time, cost and quality constraints.


The techniques of Value Management and Risk Management bring together the key stakeholders in a facilitated workshop format. The workshop is designed to discuss and agree the project objectives, identify areas of possible improvement and develop management responses to improve the probability of delivering a project to the specified quality within the prescribed timescales and budget.

Individual value and risk management studies are regularly employed by clients in order to increase the value of a project and reduce the associated risks. Unfortunately when the techniques are applied separately, differing groups of stakeholders and managers are often engaged and therefore the benefits identified at the first are either lost to the second or repeated. Where is the value in that?

By combining value and risk management at the key project stages the project objectives can be agreed, the project functions confirmed, the value opportunities developed and the associated project risks identified as an integrated process. This process reduces the volume of abortive work and allows the team to understand the direct relationship between positive uncertainties (value) and negative uncertainties (risks). In other words it brings the project team together to focus on the right way forward rather than segmenting the team into two camps; improving delivery and reducing risk.


Figure 4 outlines the activities to be applied at specific project stages and the associated benefits that will be achieved for the project. This clarifies how the value and risk management activities complement each other and therefore increase project management efficiency if combined. It is important to remember that in order to ensure that a project provides the best overall Value for Money the major value opportunities and key risks need to be identified and assessed at the earliest possible stage.

Value and Risk Management Intervention Points

Figure 4 – Value and Risk Management Intervention Points


Value and risk management techniques employ workshop facilitation, involving project teams and key stakeholders and therefore require the use of a facilitator with considerable experience employing both value and risk management techniques. As stated previously, early application of the process will achieve the greatest benefit, not only at the commencement of the project but also at the start of each distinct phase. The methods that are applicable at each key project stage are summarised in this section for clarity, although these are project dependent and should be referred to for guidance only.


Set the parameters for the development of the outline design and identify any options which may provide better value without being detrimental to the functions; identify the risks associated with the project in terms of its approval, applicability and implementability.

Concept/Preliminary Design

Select the preferred option for the completion of the outline design and identify the risks associated with this option to ensure they are managed and reduced as far as possible.

Detailed Design

Value Engineer the design to achieve maximum function while achieving minimum Capital (Capex), Operational (Opex) and Maintenance Expenditure; identify the risks associated with the design and operation of the project to enable risk reduction through the detailed design, contract and delivery.


Identify a value procurement, ensure smooth ‘handover’ of concept of design and ‘handover’ of the risk management strategy to the appropriate parties for management throughout delivery


Regularly review the value opportunity register, to ensure all benefits are being achieved and the functions being met; and concurrently revisit the risk register to review the risks applicable to the project, update the actions required to mitigate the risks and recalculate the risk analysis to ensure project expenditure remains on course and within budget.

Project Completion

Identify the value opportunities that were applied to the project and the resultant benefits; confirm why other opportunities were not applied and identify whether further benefits could have been achieved for the project; review the risks identified and confirm which were encountered throughout the project; review the probability and impact estimates and identify where inaccuracies occurred.

Confirm the management actions that were applied to reduce risks and therefore identify the benefits achieved through the value and risk management process. Finally, report on lessons learned that should be applied on future projects.


The key benefits resulting from the application of joint Value and Risk Management studies include:

  • img     Improved project decisions backed up by a developed understanding of project requirements
  • img     Enhanced project team communication
  • img     Clarity and transparency of decision making and option selection
  • img     Greater understanding of the risks involved in the project
  • img     Raised awareness of the relationship of value opportunities and their associated risks
  • img     Reduced resource requirements due to the economies of scale that result from combined studies

Potential Problems

Although combined value and risk management has been successfully applied to many projects it requires a detailed understanding of the processes of both value and risk management and their appropriate application. Most importantly, the integrated approach may benefit from a restructuring of the project team from the traditional value identification and risk management to one of uncertainty identification and management and therefore opportunity development, and this may be problematic for businesses and their organisational practices.


Value Management and Engineering and Risk Analysis and Management are proven techniques in their own right that are effectively employed by project managers worldwide. Whilst the processes and methodologies have been developed independently of each other it has become evident that they could be combined to benefit from economies of scale, reduced abortive and repeat work and more informed decision making. By combining the techniques and therefore understanding both the value opportunities and possible risks associated with decisions and project development, the team will increase in cohesiveness, improving project delivery and ensuring that the project requirements are met within the time, cost and quality parameters prescribed.


1    Connaughton J. N. and Green, S D. (1996) Value Management in Construction: A Client's Guide, London: Construction Industry Research and Information Association.

2    Miles, L. D. (1972) Techniques for Value Analysis and Engineering, New York:cGraw-Hill.

3    SAVE International (1997) Value Methodology Standard, USA:AVE International.

4    Kelly, J. and Male, S. (1993) Value Management in Design and Construction: The Economic Management of Projects, London:E. & F.N. Spon,.

5    Green, S. D. and Simister, S. J. (1996) Group decision support for value management, in The Organisation and Management of Construction, 2, E. & F.N. Spon, pp. 529-540.

6    Raftery, J. (1994) Risk Analysis in Project Management, E & FN Spon, London.

7    Institution of Civil Engineers (1996) Creating Value in Engineering, Thomas Telford, London.

8    Mak, S. W. (1995) Risk analysis in construction: a paradigm shift from a hard to soft approach, Construction Management and Economics, 13, (5). pp. 385-392.

9    Green, S.D. (2001) Towards an Integrated Script for Risk and Value Management, Project Management: International Project Management Journal, 7(1), pp 52-58.

10  Woodhead, R.M. and McCuish, J.D. (2002) Achieving Results: How to create value, London Thomas Telford

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