Target Value Design Gaining Ground
In the realm of successful projects, DPR has many examples that demonstrate how teams have made effective use of new tools and approaches. Perhaps nowhere is that better illustrated than on the $320-million, 130-bed Sutter Health Eden Medical Center (SHEMC) in Castro Valley. An 11-party integrated project delivery (IPD) team recently completed the ground-up hospital on schedule and within the original target budget after a four-year design and construction cycle—clearly a major accomplishment for a project of this magnitude in the highly regulated California healthcare market.
Though there were many drivers behind the building of SHEMC, along with other hospital projects DPR is currently working on, there is one key approach that merits closer examination. The use of target value design (TVD) is gaining traction for its ability to help create predictable cost outcomes for owners even on massive projects designed and delivered over multiple years.
An essential element of IPD, TVD can be a major catalyst for project success for a team willing to work both collaboratively and transparently and embrace an approach different from current practice. Before much of the design work takes place, the traditionally separate design team and build team, including key subcontractors, should assemble to first map out the process for how they will work together to design to cost rather than cost the design. Simultaneously, assurances must be made—often set in an IPD agreement—that “gainshare” (profit) and “painshare” (loss) can only be determined relative to the target cost. In other words, owner and team incentives must be aligned.
Root in Target Costing
TVD evolved from target costing, a practice made popular in Japan during the economically turbulent 1990s when companies focused on creating high-quality, competitively priced products.
In recent years, leading owners like Sutter Health have adapted those same principles for TVD, which essentially strives to create the best possible facility design and highest degree of value for an owner’s budget. Glenn Ballard, research director for the Project Production Systems Laboratory at the University of California (UC), Berkeley, and co-founder of the Lean Construction Institute, provided updated process benchmarks for implementing TVD, which he describes as a management practice that “seeks to make customer constraints drivers of design for the sake of value delivery.”
So why should owners consider implementing TVD, and how do they go about it? Based on an ongoing UC Berkeley study of three major DPR California hospital projects, TVD has proven to offer owners the most “bang for their buck” in today’s competitive marketplace.
Since cost informs the design process in TVD from the very first step of project planning and conceptual design all the way to final project turnover, as previously noted, it is best suited to an IPD approach in which the contractor, consultants, and key subcontractors are involved alongside the architect from the earliest design phase.
Implementing TVD involves three distinct phases: business planning, validation and design.
During business planning, owners define what they must have in their facilities and what they require for a return on investment (ROI) to establish their true allowable (i.e., bottom-line) cost for projects. They decide whether to proceed, and select a team to execute validation.
During the validation stage, the integrated team creates conceptual design alternatives and seeks to determine whether the project may be built for the allowable cost. It provides cost-saving strategies that may range from prefabrication and modularization to devising more efficient workflows to create the most value for the dollar. Typically, all of this is compiled into a report that can be presented to top management and a board of directors.
Once the project is validated and funded, TVD begins in earnest. Cost estimating and budgeting are continually updated, and every decision made must be measured against the cost target. Cross-functional teams comprising designers, builders and owner’s representatives are put together, often referred to as “clusters.” Cost targets are set for each major building component (i.e., interiors, structural, envelope, mechanical, electrical and plumbing (MEP), civil, etc.), and these cross-disciplinary cluster teams work collaboratively to design to their specific targets, while also considering a range of other factors, including constructability, aesthetics, operational efficiency, sustainability and the like.
Throughout the entire design and construction process, there are key concepts and tools that are essential for the successful implementation of TVD. The IPD framework that provides an integrated organization and information flow must be in place for TVD to be effective. Building information modeling (BIM) is also key, allowing the team to visualize, simulate and analyze design alternatives to achieve the best design solutions for the project. Lean processes and tools, such as Last Planner System®, as well as co-location in a “big room” to foster collaboration and to involve the entire supply chain and key builders in the design process, all contribute to achieving the target cost and the best value for every dollar spent.
Areas for Improvement
While there have been many studies and analyses diving much deeper into TVD, it may be instructive to recap a few of the areas for improvement identified on recent projects utilizing TVD. They include:
- PROMOTE TRANSPARENCY: It is imperative that the business case for TVD be shared with the entire team and transparency be encouraged at all stages to ensure that everyone is dialed into how the owner’s allowable cost was set.
- DEFINING THE CONTRACTUAL TERMS: The way actual cost is tracked during construction should be clearly determined in advance. In an integrated form of agreement (IFOA) contract, there is typically an “IPD contingency” bucket to cover unexpected costs incurred by the team along the way. However, there is considerable pressure on the owner to leave this fund intact to motivate the team to control costs. It is important that the triggers for using this contingency bucket and the mechanisms for doing so be made clear from the beginning to avoid conflicts.
- OWNER INVOLVEMENT: Owners must play an active role in steering delivery teams towards the value they are seeking.
- DIFFERING WORK PROCESSES BETWEEN DESIGNERS AND BUILDERS: IPD teams need to invest time and effort in the mapping process to enable team members to learn about each other’s processes and constraints, and ultimately foster greater understanding and increase collaboration.
- MODELING AND ESTIMATING IMPROVEMENTS: If possible, team members should strive to use the same software platforms to reduce the wasted time and effort that stem from software interoperability issues. The way conceptual estimates are developed could also be improved to better determine an expected cost from client requirements.
- RESPECT THE CHALLENGE AND EFFORT: Designing to target cost is difficult work. Beyond deep knowledge and technical skills, TVD requires constant communication and engagement. People must be confident and absolutely committed to achieving the goal.
TVD, along with IPD, is a work in progress. Much more can and will be learned in practice. Based on experiences to date, one thing is clear: For an owner that is seeking more predictable outcomes, committed to continuous improvement and determined to create a project with the highest possible value for the budget, TVD is an approach well worth exploring.