1. Management & Development of Complex Projects Course Code - 706 MS Project Management Value Engineering Techniques & LCC Lecture # 9

2. In previous Lecture, we have discussed about  Value engineering history & background  VA/VE Concept & definition  Value, value type, Mathematical expression of value  Reasons for poor value  Functions, levels of functions  Cost, direct material cost, direct labor cost, overhead cost  Life cycle cost Summary of Previous Lecture

3. Life Cycle Cost The Life cycle cost, which is also known as ‘cradle to grave cost’, is the total cost from acquisition of an item to the final disposal of the same after the life of the item. The elements of Life cycle cost can be narrated as: 1.Acquisition cost 2.Operational cost 3.Maintenance cost 4.Repair and replacement cost 5.Salvage cost

4. Project & Product Life-Cycle & LCC Pre-ProjectConceptDesignImple-ment.Hand-over MUD Product Life-Cyle Project Life-CyleOperational Life-Cyle ConceptDesignimplem.Hand-over MAINTENANCE ConceptDesignimplem.Hand-over UPGRADE Concept Design Imple-ment. Hand-over DISPOSALDISPOSAL PROJECTS

5. - Fuel Consumption - Oil Consumption - Tyres Wear & Tear - Parts Replacement - Vehicle Depreciation - Travel Time - Accidents Construction Maintenance Road User/ Vehicle Operating Operation Components of Total Road Transport Costs

6. Appreciation of Money Concept If Rs 100 is invested in the bank at the interest rate of 10 per cent on the first day of the year, then at the end of the year, it will become Rs 110. In other words, the present value of Rs 110, at the end of the year, is Rs 100 Year Amount at Start of Year Interest Rate Amount at End of Year 110010 %110 2 10 %121 3 10 %133.1 4 10 %146.31

7. Appreciation of Money Concept The present value (beginning of the 1st year) of Rs 146.31 (at the end of 4th year) is Rs 100.00. In a mathematical expression, the factor which when multiplied by Rs 144.10 will give Rs 100.00 is known as the ‘Present Worth Factor’. In this case, it will be 0.6835 (100.00/146.31 = 0.6835).

8. Appreciation of Money Concept Similarly, if one wants to distribute the present value at the beginning of the year into all the four years (as in this case), the present value has to be multiplied with a factor which is known as the ‘Capital Recovery Factor’. If one has to distribute the present worth of Rs100.00 into four equal installments, the multiplying Capital recovery factor will be 0.3165 for the interest rate of 10 per cent.

9. Methods of Calculating Life Cycle Cost There are two methods of calculating the Life cycle cost. These are: 1.Present worth Method 2.Annualized Method

10. Procedure of Calculating LCC ; Present Worth Method Acquisition cost: Since the acquisition cost is in the first day of the calendar year, it is the present worth and its Present worth factor is ‘1’. Operation and maintenance cost: These costs take place every year. Using the discount rate and the year when operation and maintenance cost recur, find out the Present worth factor. Multiply the costs with those factors to achieve the present worth of the individual item. Repair and replacement cost: These are single payments which may happen at any time of the life cycle. Using the discount rate and the year when repair and replacement cost recur, find out the Present worth factor. Multiply the costs with those factors to achieve the present worth of the individual item.

11. Procedure of Calculating LCC ; Present Worth Method Salvage value: This will happen at the end of the life cycle. This is the only item which is an income, when all others are expenses. Using the discount rate and the year when it is being salvaged, find out the Present worth factor. Multiply the salvage value with that factor to achieve the present worth of the item. Life cycle cost: To arrive at the Life cycle cost, add all the 3 items from last slide, then deduct item 4 from (salvage value) that total.

12. Procedure of Calculating LCC ; Annualized Method Acquisition cost: Since the acquisition cost is in the first day of the calendar year, it is the present worth. To get the annualized cost, it has to be multiplied by the Capital recovery factor based on discount rate and the life of the items. Operation and maintenance cost: These costs happen every year. Hence, they do not require any further treatment. Repair and replacement cost: These are single payments which may happen at any time of the life cycle. Using the discount rate and the year when repair and replacement cost recur, fi nd out the Present worth factor. Multiply the costs with those factors to achieve the present worth of the individual item. To get the annualized cost, it has to be multiplied by the Capital recovery factor based on discount rate and the life of the items.

13. Procedure of Calculating LCC ; Annualized Method Salvage value: This item will happen at the end of the life cycle. This is the only item which is an income, when all others are expenses. Using the discount rate and the year when it is being salvaged, find out the present worth factor. Multiply the salvage value with that factor to achieve the Present worth of the item. To get the annualized cost, it has to be multiplied by the capital recovery factor based on discount rate and the life of the items. Life cycle cost: To arrive at the Life cycle cost, add all the 3 items from last slide, then deduct item 4 from (salvage value) that total.

14. Limitations of Life Cycle Costing Life of the item: Determining the life of an item is difficult. Interest rate: The interest rate may not be same every year. Annual expenses: Annually operation and maintenance costs are assumed as the expenses occurring at the end of the year while calculating the LCC. Intermediate expenses are not taken into consideration. Quality/reliability: Not considering the quality and reliability of the item, since the focus is only on costs. The lowest LCC item may not be a good quality item. Aesthetic: Not focusing on the esteem value of the item Hence, the lowest LCC item may fail to add to the esteem of the owner even though it provides the use value. Comfort and safety: The comfort and safety of the customer are not considered while determining the LCC. Hence, there is a chance that the lowest LCC item may not provide sufficient comfort/safety resulting in poor value to the customer.

15. Following are the two types of VE / VA techniques which are most commonly used  FUNCTION–COST–WORTH ANALYSIS  FUNCTION ANALYSIS SYSTEM TECHNIQUE (FAST) Value Engineering Techniques

16.  The Function–cost–worth analysis is an excellent tool to identify the value improvement potential in any function.  This tool will not only help to identify the potential but will also give some creative ideas as to how to achieve that.  The ultimate aim of the Function–cost–worth analysis is to find out the value improvement in various functions. Based on these findings, the team will approach the problem. FUNCTION–COST–WORTH ANALYSIS

17.  Worth is the minimum cost of achieving a function.  Worth is an indispensable element of VE.  Worth varies with time.  Worth depends upon information.  Worth is usually determined by developing or thinking of other methods of performing functions.  Worth is just a technique, not an absolute value.  Where an item has several functions, determine worth of each function separately and add them to get overall worth. Concept of Worth

18.  Split the product into components and service/system into activities.  Define functions of components/activities.  Divide the total cost of product/service/system into components/ activities cost.  Processes performed to achieve particular function; cost allocated to that function.  Component provided to achieve particular function; cost allocated to that function.  Component accomplishes more than one function; allocation should be based on weight, volume, surface area and length.  Hold each function in isolation of the others to do this. Procedure for Cost Allocation

19. The difference between cost and worth is known as ‘value gap’. It indicates the scope of possible value improvement. The value index is the ratio of cost by worth. In other words, it is the cost per unit of worth. When the index is more than one, it means there is potential for value improvement. Value Gap and Value Index

20.  Write down all functions for the project as a whole.  Divide the project into parts.  Function(s) of each part to be defined in two words. An active verb and a measurable noun.  Apply three tests to identify the basic and secondary functions. Is this function what users are looking for? Yes: Basic No: Secondary If this function is eliminated, will the item continue to do the job? No: Basic Yes: Secondary Will the function disappear, if the design approach is changed? No: Basic Yes: Secondary Steps for function–cost–worth analysis

21.  Cost of each part to be ascertained.  Cost of the part to be transformed into function.  Check whether the cost of the functions are equal to the sum of the costs of the parts.  Assess the worth (least cost of achieving) functions.  First list all functions and costs in descending order.  Then ask the following questions:  Will you pay if it is your money?  If not, what do you consider reasonable?  By whom or where a similar function is available at lower cost?  What should you do to obtain the function within that cost? Steps for function–cost–worth analysis

22. Example for function–cost–worth analysis

23. The FAST is a Systematic Diagramming Technique that logically identifies and visually displays the necessary function to accommodate a design purpose Definition of FAST

24.  Classic FAST  Technically Oriented FAST  Customer Oriented FAST Different Types of FAST

25.  Prepare a list of all functions.  Use verb and noun to define a function.  Write each function in a small card.  Involve the whole team in the diagramming exercise.  Select the card which appears to be basic function.  Apply logical question ‘how’ and ‘why’ on selected function to determine functions to right and left on this selected function.  Functions satisfy ‘how–why’ logic are ‘required secondary’ functions to be put in line. Steps for The FAST diagram (Technically Oriented)

26.  Draw scope line (dotted line) on left side of basic function.  Higher order function on the left side of scope line.  ‘All time function’ to be placed in right hand top corner above critical path.  ‘Design objectives’ is placed above the basic function.  Functions that happen ‘at the same time’ placed below that function.  Right scope line (dotted) to be drawn left of function that is suitable input to the system.  Function right to the right side of right scope line is lower order/causative function Steps for The FAST diagram (Technically Oriented)

27. FAST diagram (Technically Oriented)

28. A key point of the organized VE effort is the use of the Job Plan. The Job Plan is the organized problem-solving approach that separates VE from other cost-cutting exercises. The simplest Job Plan follows a five-step approach that is integral to VE methodology. Key questions are answered at each stage. VE Job Plan

29. 1. Information Gathering Step  What functions are being provided?  What do the functions cost?  What are the functions worth?  What functions must be accomplished? 2. Creativity & Idea Generation  What else will perform the function?  How else may the function be performed? 3. Analyze Ideas/Evaluation & Selection  Will each idea perform the required functions?  How might each idea be made to work? VE Job Plan Steps

30. 4. Development of Proposal  How will the new idea work?  Will it meet all the requirements?  How much will it cost?  What is the LCC impact? 5. Presentation/ implementation & Follow-up  Why is the new idea better?  Who must be sold on the idea?  What are the advantages/disadvantages and specific benefits!  What is needed to implement the proposal? VE Job Plan Steps

32. Creativity is the art of imagination which brings something new to existence. Discovery of something that is novel, useful, relevant, economical, significant and different from the beaten track. CREATIVITY

33.  Creativity is the preserve of geniuses  Certain people are born creative  Creativity must result in a great discovery. This always persists in their mind. Misconceptions about Creativity

34.  Habitual block  Perceptual block  Cultural block  Emotional block Blocks to Creativity

35.  Brainstorming  The pareto principle ABC analysis  Gordon technique  Attribute listing  Morphological analysis  Laddering Creativity Techniques

36. In this Lecture, we have discussed about  Life cycle cost  Appreciation of money concept  Methods of life cycle costing, Annualized Method & present worth method  Limitation of LCC  VE Techniques; function, cost worth analysis & function analysis system technique  Concept of worth  VE Job plan  Creativity Summary of This Lecture

37. End Note One machine can do the work of fifty ordinary men. No machine can do the work of one Project Manager

38. THANK YOU!