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Delivering the benefits of value chain engineering

© Crossrail Ltd

In December 2018, the first passengers are expected to travel on Crossrail – a major high-speed rail line connecting London and the southeast of the UK. This soft launch will mark a major milestone in the £14.8bn project, in which the procurement team has played a central role by using value-chain engineering to manage costs and bring in innovative solutions.

 

Somewhat unusually, contracts were not awarded on a fixed price. Instead, clients and contractors worked together towards target prices. Although these initial target prices have varied somewhat, the overall costs have been in line with Crossrail’s estimates when contingencies are taken into account.

 

Part of the credit for containing costs goes to value engineering, a procurement technique of reviewing the design and specification of a purchase to understand which aspects add value to the overall objective, and which do not. It also presents an opportunity to remove any risks from the design or specification.

 

Steve Rowsell was head of procurement at Crossrail between 2007 and 2010. During this time, he brought techniques such as early contractor involvement into the procurement process, building upon methods he used working as the procurement director at the UK Highways Agency.

 

“What you find is that early involvement of the contractor means they have a much better understanding of what the client is trying to achieve. It gives them longer to come up with alternative solutions and innovations, and gives the client longer to feel comfortable with those alternatives,” says Rowsell, who is currently director of Rowsell Wright, a construction procurement consultancy currently advising UK high-speed rail project HS2 and road-building agency Highways England.

Buyers’ responsibilities

Early contractor involvement in work on the Royal Docks’ Connaught Tunnel, which dates back to 1878, was an early success for the procurement team. Contractors recognised opportunities to improve the construction techniques, which led to savings of tens of millions of pounds.

 

But Rowsell says clients also have responsibilities if they want value engineering to succeed.

 

“The client has to be ready and capable of delivering the contract in a way that reflects a collaborative culture – not just in soft policies, but in real processes,” he says.

 

As well as improving the technical design, he believes value engineering can also identify ways to improve processes and governance.

 

“This can be just as important in improving the way the parties work together in things like design approval, making it more efficient.”

Focus on outcomes

Procurement should, however, also be aware of the pitfalls of value engineering has weaknesses procurement professionals need to be aware of before employing the technique.

 

Martin Rowark, chair of the Royal Institution of Chartered Surveyors Infrastructure Forum Steering Group and former procurement director at Crossrail, says: “A weakness of value engineering is it focuses on input and decouples itself from outcomes. What is Crossrail? It is the promise of mobility to stimulate GDP. You don’t need to use Crossrail to get that benefit – local business can benefit merely by being near a station. There can be decoupling from those outcomes.

 

“We talk about value, but what do we mean? Value engineering can be very loosely used. You have to be absolutely focused, and remain focused, on outcomes and high-level outputs. An outcome could be a photo of London Mayor Sadiq Khan in a year’s time standing in front of a tunnel portal and Bombardier rolling stock with a ribbon and scissors. These opportunities are important and have reputational value. They give confidence in the programme.”

 

Crossrail selected suppliers on the basis of target price contracts and then asked them to look for value engineering opportunities, which meant surrendering designs earlier than anticipated, Rowark says.

 

“That is good in theory. In practice, lots of factors come to bear.”

 

Changes to the design of a specific component, such as a light fitting, to save money can have a number of effects in terms of choice of duct and wiring, and so on.

 

“Value engineering is always challenged by knock-on factors and can have implications, largely around method,” says Rowark.

 

“A contractor may find a £100,000 saving, but you realise it would create a £200,000 design cost to implement. In pushing the target down, that can put costs up somewhere else. It’s a bit like the game ‘whack-a-mole’. We ended up asking contractors to come up with mini-business cases for design changes, with all the factors taken into account.”

 

Another challenge for value engineering in construction, he adds, is that contractors tend to bid low to maintain their order books and cash flow. Although this can be offset by placing greater emphasis on value than the price during the tender process, this also has its problems. Value criteria tend to be scored around the middle – nobody receives five out of five, nobody gets zero. There can be as many as 60 value criteria, from health and safety to sustainability. Together, these factors mean contractors regress to similar value scores.

 

“You can have a very vanilla-quality competition. Then, mathematically, it comes down to price,” Rowark says.

The impact of digitisation

Others see things differently. Christian Michalak, head of procurement transformation for Capgemini in central Europe, says value engineering is one of the most successful procurement techniques he has seen in 18 years of consulting.

 

“It will also become more relevant in future as businesses look at opportunities to digitise products and services,” he says.

 

Michalak says successful value engineering tends to look to bring together different parts of the business, rather than focusing on engineering or technical problems.

 

“It is now a cross-functional discipline: many departments should be involved. It could include marketing and sales, as 80% of costs are defined in the early stage of design and development, so the customer’s view is helpful in value engineering.”

 

But procurement faces challenges in encouraging this early involvement throughout the organisation. Michalak sees problems in getting planning data from sales departments and operational data from enterprise resource planning systems.

 

In response, he says, procurement professionals need to possess classic business expertise, in addition to knowledge of the relevant engineering and technology, as well as the production or manufacturing process.

 

“They also need good communication skills to encourage the involvement of other departments. In most companies, people start with people who have engineering or technical backgrounds and then train them,” Michalak says. “These skills can be hard to find.”

 

Image: © Crossrail Ltd

 

This article is a piece of independent journalism, written by an experienced journalist and commissioned exclusively by Procurement Leaders.

 

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