Professional Documents
Culture Documents
DS70 190
DS70 190
DESIGN 2012
2
Dubrovniik - Croatia, May
M 21 - 24, 2012.
2
TARG
GET VAL
LUE DESIIGN
G. Ballaard
1. Introoduction
Newnes,, et al. [2008] explores the problem m of predictin ng whole liffe cost for loow volume, complex
productss. Construction is mentio oned, but onlly electrical systems and d componentts are addressed. This
paper exxplores the prroblem in co onstruction, w with a study of target value design (T TVD), the name given
to an adaaptation of taarget costing g from manuufacturing’s product
p development [Coooper and Slaagmulder
1997] too constructionn projects [M Macomber ett al. 2007]. Although
A cost estimation is a part of TVD,
T the
objectivee is rather to cause than to t predict.
Construcction projectts are a type of product ddevelopmentt, differentiatted primarilyy by the prod ducts that
are deveeloped, whichh are rooted in place and hence uniqu ue at least as regards locaation [Ballardd 2005a].
This loccation uniqueeness is ofteen supplemeented by cusstomer uniqu ueness. Thiss building, bridge,
b or
factory iis typically designed
d and
d constructedd for a specific customerr. It is very rrare that pro oducts are
producedd ahead of cuustomer dem mand or that multiple cop pies of produuct designs aare produced. Further,
apart froom housing, product arch hitecture tendds to be inteegrated as op pposed to moodular, increeasing the
coordinaation challennge in desig gn. Historicaally, constru uction projeccts have als o had the following
f
characteristics:
• P Projects havve been strucctured as seqquential proccessing systeems, with eaach specialistt brought
oonto the team
m only when n their specifific task is to be
b performed d.
• D Design has been
b producced with a fo focus on meeeting custom mer functionaal requiremeents, then
ccosted, resullting in rework to reduce cost within budget.
b
Sequentiial processinng and desig gn-driven coost were alsso characteriistic of mannufacturing’ss product
developm ment until thhe 1980s. In nnovations inn product development such s as targeet costing, co
oncurrent
engineerring, and suupply chain managemennt came latter to consttruction. Forr example, the first
successfuful applicatioon of target costing
c in coonstruction was
w reported in Ballard & Reiser [200 04] about
a projectt completed in i 2002. In a comparativ e study of prroduct develo opment and cconstruction n projects,
Zika-Vikktorsson, et al. [2003] fo ound that “… …social proccesses requirring concepttual co-operaation and
communnication weree less prono ounced in thhe constructiion projects investigatedd.” This diffference is
tentativeely attributedd to the diffference in thhe nature off the work in the two pproject typess, but the
authors recognize thhe possibility y that the diifference is rather
r a funcction of the way the pro ojects are
organizeed and managged.
This papper reports onn the phenom menon of targget value dessign (TVD) in i projects deedicated to thhe design
and connstruction off healthcare facilities. Itts findings support s the view that cconstruction projects,
despite ttheir differeences in products and reelationship to t the customer, can beenefit from the t same
innovatioons in organization an nd managem ment that haveh emerged in manu nufacturing’s product
developm ment. Howevver, the pecu uliarities of construction n projects coould well be relevant to trends in
manufaccturing, as thhe drive for customizatioon increases.. We return to this latterr consideration in the
conclusions and recoommendation ns for future research.
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The paper consists of a description of target value design and its component phases, project definition
and designing to targets, a review of key projects in the development of TVD and the performance of
TVD projects, an account of commercial terms, current research to further develop the methodology,
and finally a conclusion and recommendations for future research.
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If the reccommendation of the pro oject team iss to fund and
d if that recom
mmendationn is accepted, the next
step is fo
for the clientt to set a targget cost loweer than the budget
b and to negotiate aan agreemen nt how to
share thee cost savinggs with mem mbers of the pproject team.. However, if there is stilll a substantiial gap to
be overccome betweeen budget and a the marrket benchm mark, setting of a more aggressive target is
deferredd until projectt financial feeasibility is aassured.
Figure 2. B
Basic commeercial modell
That defferral of settiing a target cost
c below bbudget is whaat happened on Sutter Heealth’s Catheedral Hill
Hospitall Project in San
S Franciscco. As show wn in Figure 3, the projecct was fundeed by the client even
though tthe expectedd cost producced by the vvalidation stu udy was $600 million aboove the $911 million
allowablle cost for coonstruction (tthe completee project wass expected to o cost $1.7 biillion in totall). It took
14 montths before thhe expected cost matcheed the budgeet. Once it was w sufficienntly below budget,
b a
target coost was set $70
$ million belowb and a gainsharing g agreement made betweeen the clien nt and the
memberss of the project team thatt were in thee risk pool. The T $70 million was deteermined by adding a up
the estim
mated cost of o additions to the projeect scope thee client wou uld fund from m cost savin ngs; e.g.,
providinng patient liftts in all hospital beds rathher than the limited
l numb
ber funded inn the budget.
14 DE
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AND MANAG
GEMENT
1.1.2 Designing to targets
The following recommendations regarding Designing to Targets are from the 2009 P2SL Process
Benchmark for TVD:
1. Target scope and cost are allocated to cross-functional TVD teams, typically by facility
system; e.g., structural, mechanical, electrical, exterior, interiors,
2. TVD teams update their cost estimates and basis of estimate (scope) frequently. Example from
a major hospital project during the period when TVD teams were heavily in design: estimate
updates by each cluster at most every three weeks.
3. The project cost estimate is updated frequently to reflect TVD team updates. This could be a
plus/minus report with consolidated reports at greater intervals. Often project cost estimates
are updated and reviewed in weekly meetings of TVD team coordinators and discipline leads,
open to all project team members.
4. Co-location is strongly advised, at least when teams are newly formed. Co-location need not
be permanent; team meetings can be held weekly or more frequently.
Substantial changes in roles and behaviors are required from conventional, amounting to a
cultural change and requiring strong and dedicated leadership. As an example, consider Sutter
Health’s 5 Big Ideas:
1. Collaborate, Really Collaborate: It’s not enough to ‘play nice’ and be polite. What’s wanted is
to work together productively, making the best use of everyone’s capabilities.
2. Optimize the Whole: As opposed to the reductionism traditionally seen in work breakdown
structures, recognize that not all parts of a project can be optimized simultaneously,
consequently, it’s necessary for money to be able to move across organizational and
contractual boundaries in search of the best project-level investment.
3. Tightly Couple Learning With Action: Lean is a learning system in which learning comes from
experiments (intended deviation from process) and from breakdowns (unintended deviation
from outcomes).
4. Projects as Networks of Commitments: Most people take their promises seriously. If they did
not, human collaboration would be impossible. Yet promises are neither solicited nor made in
traditional project management. Plans are mutual commitments among those whose actions are
specified in the plan. Commitments are made person-to-person between ‘suppliers’ and
‘customers’, creating a web that can be modeled as a logic network.
5. Increase Relatedness: Effective collaboration is conditioned by trust and confidence, which in
turn are generated by reliable behavior (not least, doing what you say you will do; keeping
your promises) and by seeing others as people like and unlike yourself.
The targget cost for the project, $12,067,68 1, was alloccated to the TVD teamss, each of which w had
represenntatives from the client, th
he architect, the construcction manageer (Boldt), annd the relevaant design
engineerrs and speciaalty contractoors. As an exxample of allocation, thee Site Work T TVD team was w given
a target cost of $5944,500. As a result
r of disccovering uneexpected soil conditions, the expected d cost for
site workk exploded to
t $1,100,000. A combinnation of pro oject contingeency and funnds transfer was used
to coverr the additionnal cost, with $300,000 coming from m contingenccy and the reemainder fro om target
cost undderruns by thhe mechanical and the e lectrical TV VD teams. Th his highlightted the impo ortance of
structuring commerccial terms an nd relationshhips so thatt money cou uld move accross contracctual and
organizaational bounddaries as needed to meet pproject objecctives.
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Table 2. Worth/Cost model (from Ballard & Reiser 2004)
Legend:
Worth/Cost Model Const TOTAL
per SF
D-B TOTAL
per SF
Project:
Location:
Fieldhouse Expansion
St. Olaf College Northfield MN
Value Engineering Study Worth (Target) #DIV/0! #DIV/0! Phase of Design: Schematic Target
Current Estimate 101.06 105.86 Date: June 21, 2001
Construction Design-Build
Construction Owner Reserves Escalation
TOTAL TOTAL NOTES:
Bldg. Type: Recreational
11,178,100 343,115 11,521,215 12,067,681 Target (SQFT)
Incl Design at $504,886+41600 114,000
Floors: Single story plus mezzanines
SITE WORK BUILDING
594,500 10,583,600
G10 Site Prep, A10 Foundation C10 Interior D5010 Service E10 Specialties & Z1010 Project
D20 Plumbing
Demo & Excav A20 Basement Construction and Distribution Equipment Administration
G20 Site B10 D5020 Lighting & E20 Furnishings Z1030 General
C20 Stairs D30 HVAC
Improvements Superstructure Branch Wiring Fixed/Movable Conditions
G30+40 All B20 Exterior C30 Interior D40 Fire D5030 Security F10 Special
Z1060 Fee
Utilities Closure Finishes Protection Comm/Data Construction
G90 Other Site Testing and D5090 Other F20 Selective Z20 Risk and
B30 Roofing D10 Conveying
Structures Special Mech Electrical Demolition Contingency
Comparative evaluation of projects is difficult because the number of variables potentially impacting
performance are so numerous, with multiple interdependencies difficult to understand. This case
provides one of the best opportunities for comparative evaluation. Carleton College, another small
liberal arts college in the same city, had built a similar facility only two years earlier. As shown in
Table 3, comparison revealed that St. Olaf’s Fieldhouse took 10 months less to design and build, at 2/3
the cost per square foot compared to Carleton’s Recreation Center.
Figure 5.
5 Sutter Faiirfield cost eestimate histtory (The Bo
oldt Compaany 2008)
As show wn in Figure 5 (Cost is in
n gold, Continngency is in blue, and Saavings expennded on valu ue-adds is
in greenn), the cost estimate
e tren
nded downw ward through h design and on, ending $1 million
d construction
below thhe project buudget. Most of that $1 m
million was sp pent adding features to tthe facility valued
v by
the cliennt.
3. Com
mmercial teerms in ta
arget valuee design
Compennsation for seervice provid ders that are members off the risk poo
ol, whether ddesign or connstruction
professioonals, is throough reimburrsement for tthe costs of work
w and pro
oject overheaads, plus a negotiated
n
fixed feee and the oppportunity to increase proofits through gainsharing. Over time, more and more
m team
memberss are being included
i t risk pooll. If any are excluded wh
in the hose work iss interdepend dent with
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that of risk pool members, there is a risk that they will not devote the same level of effort, and thus be
constraints on project performance.
As illustrated in Figure 2, targets for performance improvement, whether in cost or value delivered,
are not expressed in project budgets, but rather in separate targets, supported by
gainsharing/painsharing agreements. Project performance is judged relative to budgets and schedules.
Setting budgets and schedules as stretch goals has traditionally been done in pursuit of paying least
cost, but increases the risk of project failure. TVD provides an alternative means for continuous
performance improvement without unnecessary risk, and creates the means, integrated teams with
aligned commercial interests, for reducing the probability of risk events occurring.
The budget (this could also or alternatively be the schedule, a sustainability rating such as LEED
points, or other condition of satisfaction) is the boundary between painsharing and gainsharing in a
TVD arrangement. Setting that boundary based on the client’s allowable cost incurs the least risk. It
cannot be reduced without violating the client’s business case. If cost at project completion is greater
than budget, the design and construction companies in the risk pool sacrifice some or all their fees to
pay the overrun. If the project is completed below the budget, members of the risk pool increase their
fees by some percentage of the cost underrun.
This limits the cost risk borne by service providers and provides the client a financial buffer equal to
the sum total of fees at risk, perhaps 5-10% of total project cost. Admittedly, the client bears the risk
of catastrophic loss; cost overruns greater than the fee buffer and any applicable insurance. No TVD
projects to date have exceeded their budgets, hence there is no empirical data on the risk clients are
assuming. The TVD methodology involves a change in strategy, from risk shifting to collaborative
mitigation of the probability of risk events occurring. However, TVD has a short history and there will
undoubtedly be failed TVD projects that will test the industry’s acceptance of this new approach to
project delivery3.
3 BAA’s Terminal 5 Project at Heathrow Airport posed the risk of catastrophic loss at the corporate level. The
estimated cost for the project approached the net worth of BAA. Their response was to assume all risk, set
the project budget generously (so it actually contained financial contingency), and agree to split cost savings
with their framework suppliers. Critics claim they spent more than they should have, but the project was
completed within budget and catastrophic loss was avoided.
5. Conclusion
Construcction projectts using the target valuee design metthodology have been pre resented to show
s that
product developmennt methodolo ogies such ass target costiing, concurreent engineeri ring and supp ply chain
managem ment can bee beneficially y applied too the manag gement of co onstruction pprojects desp pite their
differencces. Behaviooral differencces noted in tthe literaturee, such as thaat reported byy Zika-Vikto orsson, et
al. [20022] may well be the resullt not of the ineluctable differences between prooduct develo opment in
construcction and inn repetitive manufacturring, but rather the ressult of diffferences in the way
construcction projectss have traditionally been structured an nd managed.
Target vvalue designn is a projecct managemeent methodo ology that has been widdely adopted d in U.S.
healthcaare. Two anoomalous and beneficial feeatures of TV VD projects are 1) estim mated cost fallls during
the courrse of project execution n, and 2) prrojects are completed
c substantially under mark ket costs.
Current research is underway to t extend itss application n beyond heealthcare andd education to other
construcction industryy sectors an nd to other project deliv very approaches than thhe Integrated d Project
Deliveryy4 [Cohen 2010]
2 that has
h been moost frequentlly used on TVD projeccts. Research h is also
underwaay under thee title, Wholle Life Targget Value Design, to red duce the obbstacles to generating
greater vvalue for customers and for service providers. Collaborators
C s in these reesearch initiaatives are
welcomee.
Future rresearch is also needed d on the oopportunity to learn ab bout ‘mass customizatio on’ from
construcction’s produuct developm ment, which is predomin nately dedicaated to the ddelivery of value
v to a
specific customer(s) in specific circumstance
c s.
Referen
nces
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annual coonference of thhe Internation
nal Group for Lean Constru
uction, Sydneyy, Australia. P
Pp. 29-36.
4
Integratted Project Deelivery is charracterized by a single conttract signed by
y all companiies on the pro
oject team,
cost--reimbursable contracts with
w fixed ffees, limited risk for seervice providders, gainshaaring, and
organnizational inteegration.
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