Value adding systems in construction projects

Langford, Martinez and Bititci (2003: 2) mention that the modern school of interpreting value was started by Marx in 1886, who was one of the early proponents of the labour theory of value. In his classical work entitled „Capital‟, Marx (1886 cited in Langford et al., 2003: 2) argued that “value was gained by the application of labour in the production process”, and later it was then adapted by engineering in the 1950s and 1960s, into what is known as value analysis and value engineering. The engineering theories perceived value as the maximisation of the business efficiency through elimination of waste (Gage, 1969 cited by Langford et al., 2003: 2). In the middle of 1980, Porter (1985) applied the labour theory in operations by the introduction of the value-added activities at the business process level that is each activity of the business process adds value to the product (Langford et al., 2003: 2).

Al-Mudimigh, Zairi and Ahmed (2004: 311) mention that although „value‟ has many definitions, the common theme that exists throughout all the definitions is that: customer value is linked to the use of product or service, thereby removing it from personal „value‟; customer value is perceived by the customers rather than objectively determined by the seller; and customer value involves a trade-off between what the customer receives such as quality, benefits, worth and what he/she gives up to acquire and use a product or service such as price and sacrifices. Al-Mudimigh et al. (2004: 311) mention that several authors have argued that the creation of value is managed through supply chains (Houlihan, 1987), value chain (Porter, 1985) and customer chain (Schonberger, 1990), each of which refers to a series of integrated dependent processes through which specifications are transformed to finished deliverables. Emphasis is placed on the integration of activities while focusing on increasing value for the customer.

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Male (2002: 28) looks at project value as a system which is perpetual and view what constitute value as dependent upon a person‟s role in the construction process. Thus each participant has a value system which sees a construction project creating value in the corporate sense by adding to the client‟s principal goal. In the system (Male, 2002: 28) firstly views value as measured at the level of the strategic business unit, then secondly, the value chain is evaluated in a multi value system where each of the stakeholders evaluate value from their perspective. Finally, the user value system is where users take over the facility and it becomes evaluated from the perspective of fitness for purpose. Figure 2.3 illustrates the value systems and value chain in a construction project

Corporate value Business value Project value Design value Construction value Commission value Operational value Client‟s value chain Financier‟s/ banker‟s value chain Internal stakeholder‟s value chain Client‟s value system Designer‟s value system Contractor‟s value system Regulatory authority‟s value system User‟s value chain Contractor‟s value chain Regulatory authority‟s value chain Customer‟s value chain Client‟s value chain Financier/ banker‟s value chain Supplier‟s value system Project manage‟s value system Specialist contractor‟s value system Quality surveyor‟s value system Customer‟s value chain External stakeholder‟s value chain Regulatory authority‟s value chain

Client value system Multi value system User value system

Project value chain

Figure 2.3 Typical project value systems and value chains

Source: Male (2002: 29)

In support of Male‟s (2002: 29) view of value as a system comprising of client value systems, multi value system, and user value system, Wong, Cheung and Chan (2004: 13) propose that a construction project could be divided into three distinct value systems, namely the strategic value system, tactical value system, and user value system. These systems all have different combinations of value chains for different organisations. Wong et al. (2004: 13) then contend that the strategic value system is concerned with the project to be

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constructed to meet business or social objectives depending on the type of client. While the tactical value system involves the processes at which the client effectively out-sources the project to the construction industry in the form of a technical project to meet that need. In this phase, alliances of different organisational value chains involved in the project process form a holistic value-driven project focussed demand chain working for the benefit of the client. The last phase is the operational value system, where the project hands from the construction team to the client, ready for use. The operational value generated depends on the satisfaction level of end the user on taking over the end product.

Langford et al. (2003: 11) provide a broader picture of value in a construction project by proposing that value should be defined as a system and as a flow. They opine that value systems and value flow try to give a new approach to the value definition from the two different perspectives, namely „client‟ and „contractor‟. Hence, value flows from suppliers/ contractors to clients as well as from clients to contractors. The model developed by Langford et al. (2003: 12) (Figure 2.4) shows the left side of the diagram presenting the organisation and its environment, while the right side indicated as „value‟ presents values from both perspectives. The contractor‟s side is subdivided into two, one column to show the „internal organisational environment‟ and the other side shows the „external environment of the organisation‟.

The final Target… VALUE

Gained from Resides in Satisfaction of clients Expectations £ = SP-VA-T Reputation Profit

Gain market Company_development

Measure

Achieved by

The value of the product is determined by the clients Satisfaction via Clients expectations. The value of a product is given in relation to the

Benefits perceived. Clients Organisation VALUE Construction Organisation EXTERNAL INTERNAL Competitors Suppliers Clients Perception of the Benefits Fulfilled through Through Supplied Design SuppliersReputation Supply chain Organisational Environment Construction market Clients Substitutes (refurbish rather than new build)

Construction

External forces that make influence

Figure 2.3: The value systems and value flow

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In Figure 2.4, the organisation‟s perspective of value is highlighted by the flow of the square arrows shown in the inner circle of the diagram. This value stream runs from the organisation anticlockwise. Thus, it can be defined that „construction organisation measures value through profits that it creates, which is gained from the clients through construction products or services applied‟. The value from the client‟s perspective is illustrated by the flow of curved arrows shown by the outer cycle, beginning at the client and flowing clockwise. This defines value as “value resides in the satisfaction of the client‟s expectations, which is achieved by the contractor through fulfilment of the client‟s perception of the benefits provided by the building.”