STATEMENT OF DOUGLAS EARICH, VICE PRESIDENT, MANAGEMENT TECHNOLOGY, INC., PRESENTED BY KERN SMITH, ACCOMPANIED BY JAMES FLANAGAN

Mr. SMITH. Thank you, Mr. Chairman.

Douglas Earich who was to have given this paper is ill and unable to be here today.

I should like to introduce Mr. James Flanagan, also from Management Technology, Inc., who is accompanying me.

It is an honor to appear before this committee, and I will read from the prepared statement of Mr. Earich.

Value engineering, or its synonymous term-value analysis is a relatively new management technique-having been on the business scene as an organized effort or tool since about 1949. However, its basic underlying concept-the commonsense approach to identifying unnecessary costs and then the decisionmaking required to eliminate such costs is really achieved through the new or rearrangement of familiar things plus the addition of a few new items.

For illustration purposes-the automobile was created through the rearrangement of such components as iron, copper, fabric, wheels, and an engine. These same components-plus a few others, such as a propeller-were again in later years rearranged to create the airplane, a new product which increased the efficiency of transporting people over long distances with comfort, safety and speed-the same primary purpose of the automobile. However, it is contended that the airplane accomplishes this purpose more efficiently and effectively.

Likewise, value engineering was devised primarily through the rearrangement of known concepts, plus the addition of a few new ones. To date, value engineering has been employed primarily in connection with work being performed by or for the Department of Defense, and principally in connection with manufacturing. The manner in which it is utilized involves the identification of relatively detailed project costs after a contract has been awarded.

This requires that a contractor identify all costs and then eliminate discovered unnecessary costs. This necessitates the analysis of functions performed as well as the resources utilized in order to achieve the completion of required tasks at the lowest overall cost consistent with requisite performance, reliability, and maintainability.

Therefore, if there are easier ways or other materials available which can accomplish the required task as efficiently and effectively as those previously contemplated and planned for these methods and materials would be employed. If a contractor can figure out new procedures or material usage which are acceptable, he would receive part of the money saved as a reward, with this determination being made and considered in establishing an equitable adjustment of the contract price.

This is basically the manner in which value engineering has been employed in the Department of Defense. It has, in general, been a workable program and one which has proven to be beneficial to both the Department and the contractors involved.

The topic of this seminar relates to the introduction of value engineering into public works projects. Seemingly, some effort in this area has already been initiated as evidenced by the recently reported inten

tions of the State of Hawaii to introduce this technique into public works activities at the State and county levels. Although the utilization of this technique in this field is relatively new, preliminary evaluations as to how value engineering can play an important role in public works projects can be made.

It is believed that value engineering can be useful in the design of projects. In this respect, various design approaches should be considered as potential alternatives for accomplishing a given project. Although in most instances emphasis should be given to construction cost reductions, it is believed that a longer term evaluation must also be made as to reliability and maintainability.

This latter factor will be of significant importance in years to come on such public works programs as the Interstate Highway System wherein the maintenance of these roadways-at present wholly supported by the States-will require significant expenditures of fundsfar in excess of the original costs of construction. Therefore, the design efforts for such projects must consider the value of the initial costs for completion, as well as the projected long-term costs for maintenance.

This might well be termed "preventive value engineering" and its utilization could include other benefits--such as safety and beautification-which perhaps are difficult to express or define in terms of dollar savings

In the areas of construction of public works projects, it is believed that value engineering can play an important role. However, in order to secure the potential benefits that can be derived, deviations from existing practices will, in all probability, have to be made. For example, most public works projects are generally cited and specifically delineated as to requirements and specifications. As a result, the award of a construction contract is usually determined on the basis of the low bid submitted from among a group of prequalified bidders.

There is generally no review or consideration given until after the award of a contract as to the manner in which the successful bidder intends to accomplish the work effort. In this respect, it might well prove to be beneficial to require that bidders indicate at the time they submit their bid the manner in which they intend to pursue the project. This is now being done in some instances by the submission of critical path method (CPM) networks, a procedure being followed by the State Road Commission of West Virginia on Interstate Highway projects. However, these are usually only required from the successful bidder and not from all the bidders at the time they submit their estimates. This suggested change in approach might be included in the bidding process. However, in all probability, additional information other than that which can be provided on a network should also be submitted.

Further, it might be well at this point to encourage bidders to challenge requirements and specifications. If they believe that they have a better method or approach than that presented in the request for a bid, it should be outlined and submitted for consideration.

If such a new approach is accepted in lieu of the requirements and specifications furnished with the request for bids and if, in fact, the approach suggested will result in financial savings from the costs previously estimated and utilized in connection with the evaluation of bids, then provisions should be made for the successful bidder who

has used ingenuity, imagination, and initiative to benefit in these savings.

Provisions should also be made in construction contracts for innovations which are determined acceptable for implementation and which are suggested during the actual period of construction. Again, contractors should be encouraged to delineate such value engineered proposals by providing a means for them to share in the savings achieved.

The above constitute a few thoughts as to how value engineering could prove useful in public works projects. However, as in about every endeavor there are assets and liabilities which must be recognized and considered if value engineering is introduced into public works project management. The above constituted primary advantages; the following are from preliminary citations as to potential disadvantages.

As previously stated-value engineering involves the identification of unnecessary costs and the decisionmaking necessary to eliminate these costs. The initial part of this task is generally the easier of the two; the latter may have significant impact if all factors are not carefully considered. For example, as a value engineering approach it may be deemed appropriate to introduce and substitute prefabricated items for items previously produced at the work site. These prefabricated items will, in all probability, cost less and have the same utilitarian and functional usefulness. However, the location and utilization of an employee skill under such a condition might well be reduced or eliminated at the work site-having been shifted to the location where the prefabricated items was constructed. This condition might conceivably not be in the best interests of the total project and, therefore, the decision to eliminate the unnecessary costs involved if based purely upon a reduction in unit costs could well be inappropriate.

Further, if a modification is suggested to an ongoing public works program and if this program is being maintained cooperatively by several activities-such as the construction of the Interstate Highway System wherein the Federal and State Governments are involved-the time required to evaluate the proposed change by all appropriate agencies might prove to be excessive and could even conceivably delay the program. Under such a situation, the savings which might be achieved through a value engineering approach could be more than offset by the costs of delay. In such circumstances, the solution might be to continue the present project as previously determined and to incorporate the suggested revision into a later phase of the program or in another project-assuming there would be additional work of a

similar nature.

In summary-I would think that value engineering has a place in public works management and that its advantages will exceed its disadvantages. However, as in the program itself, a "commonsense" approach in its utilization and implementation is required.

Senator TYDINGS. It appears that ideally value engineering has got to take place at the design level.

Mr. SMITH. That is correct. It must be done upstream before the project is designed and developed for implementation.

Senator TYDINGS. Has your organization had much experience with the Corps of Engineers?

Mr. SMITH. No, I have not.

Senator TYDINGS. Have you ever had a contract with them or worked with them?

Mr. SMITH. I am not certain that our company has not worked for them in the West. We have not in the Washington office worked for the Corps of Engineers. Most of our work has been with the highway agencies in a number of States and with the Federal Water Pollution Control Administration and with a number of large contractors who work in Government projects.

Senator TYDINGS. Are you familiar with the new design approach to urban highway construction which is now being utilized by the city of Baltimore in order to save our city from being desecrated by the roadbuilders?

Mr. SMITH. Yes. I worked on the Baltimore project.

Senator TYDINGS. Are you familiar with what is going on?
Mr. SMITH. Not up to this point; no.

Senator TYDINGS. Do you know what the design concept approach is?

Mr. SMITH. Yes.

Senator TYDINGS. How does that relate to value engineering?

Mr. SMITH. Well, first, in the Baltimore case, our company ran the schedule of the Interstate System wholly within the city and our contract there was to schedule and phase each one of the interstate projects on I-70 and I-95 which was going to be held within the city of Baltimore. We let the project there at that stage and the right of way which is being taken at that time for some of the project so I am not familiar.

Senator TYDINGS. When did your company leave the scene?

Mr. SMITH. When the debate became overheated about the right of way for I-70.

Senator TYDINGS. Well, that has been since the beginning but I gather you left before the design concept team was brought in? Mr. SMITH. At the time; yes. We left just about that time.

Senator TYDINGS. Senator Fong?

Senator FONG. Yes, sir, Mr. Chairman.

Mr. Smith, value engineering would be a very controversial matter, would it not, for a designer to confront?

For example, we employ one designer and he had an idea. Then the bidder comes in and says, "We don't think that this is the best thing; this other way of handling it is the better." You get into quite a lot of trouble.

Mr. SMITH. Yes; and it extends into many of the disciplines, the professional disciplines. It is a problem. We know that there is a great reluctance on the part of departments, to change any of their concepts, and to accept new ideas.

We have to be consistent and keep fighting and keep plugging away to get them to accept most of the new technologies that are developed. Senator FONG. In the Defense Department, it works because there are so many things that are experimental.

Mr. SMITH. Tha is right.

Senator FONG. So, one man's word as against another man's word is sometimes a flip of the coin as to who gives the better idea.

Mr. SMITH. Each one will maintain that he has the best idea.

Senator FONG. Yes. In the field of public works, where things have been tried for long periods of time, you actually get into a fight between designers, don't you?

Mr. SMITH. Yes; you do.

Senator FONG. And unless you give to the agency that sends the bids out a right to negotiate and to work the thing out, you are not going to have much value if you adopt the idea.

Mr. SMITH. That is right. We at MTI believe that each project is unique and requires a custom approach.

Senator FONG. So, it means that bidding would be very circumscribed. You may allow a bid to go forward according to the designer's intent and then after the bid has been secured you can sit down and work with the individual who has secured the bid and see where things could be cut under those circumstances, probably.

Mr. SMITH. That is right, and that is being done. Today I notice a great deal more in industry than in our nondefense agencies of the Government and I would like to see this extended further in our nondefense sector.

Industry is becoming extremely cost conscious. The Watergate project which our company worked on, there was a project where the interstate highway just going by was one of the impediments—well, they established some penalty constraints due to the construction of that but had it not been for a CPM network that was developed on that project, the company would have put out an additional $200,000 because they considered the interstate highway had a scheduled deadline, that they would have to work overtime for all of the floors of that project.

As it turned out, only three of the floors were deemed to be critical and when the three floors were up to their level and completed the interstate highway could go ahead. There was a tremendous saving there in time and it also, in that instance, permitted the deployment of highly skilled labor on another project in which this same company was engaged.

These are things that industry is doing now.

Senator FONG. Industry is employing this practice?

Mr. SMITH. Yes; they are.

Senator FONG. Do they ask for a bid first or do they usually go out and negotiate a contract? How do they do it?

Mr. SMITH. We see them go both ways.

Senator FONG. Both ways?

Mr. SMITH. Yes, sir.

Senator FONG. Once they follow the bid program first, after the bid is secured, then at that time they sit down and ask where they can cut costs; is that correct?

Mr. SMITH. Yes. More and more they are asked to bid on a CPM schedule so that the sequence is laid out before they are finally awarded the contract.

Senator FONG. This would be helpful as far as the Government is concerned.

Mr. SMITH. Yes.

Senator FONG. Ask the contractor to sit down and see where you can cut costs.

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